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Capitalism is an economic and social system in which most trade, industry and the means of production (capital) is privately controlled and operated for a profit The means of production (also known as capital), are owned, operated, and traded for the purpose of generating profits for private owners, either singly or jointly. This is in contrast with economic systems in which the means of production are owned by the state or cooperatively, and are operated for goals aside from turning a profit.
In a capitalist system, investments, distribution, income, production, pricing and supply of goods, commodities and services are determined by voluntary private decisions, usually within the context of markets. A distinguishing feature of capitalism is that each person owns his or her own labor, and is therefore allowed to sell the use of it to employers. In a capitalist state, private property rights are protected by the rule of law of a government through a limited regulatory framework. In a capitalist state, legislative action is confined to defining and enforcing the basic rules of the market, although the government may provide some public goods and infrastructure.
The central axiom of free-market capitalism is that the best allocation of resources is achieved through consumers having free choice, and producers responding accordingly to meet consumer demand. This contrasts with economic planning, in which the state directs what shall be produced based based on rational economic planning. This also contrasts with decentralized economic planning and democratic worker management. Capitalists believe that the privatization of state-provided services can achieve more efficient outcomes by enabling them to better respond to market forces. Capitalists usually support free trade and the abolition of subsidies.
Capitalist economic practices incrementally became institutionalized in England between the 16th and 19th centuries, although some features of capitalist organization existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages. Capitalism has been dominant in the Western world since the end of feudalism. Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.
Some consider laissez-faire to be pure capitalism, although it has never existed in practice. Laissez-faire signifies minimizing or eliminating state interference in economic affairs, allowing the free play of supply and demand. All large economies today have a mixture of private and public ownership and control, so some feel that the term mixed economy describes most contemporary economies. In the capitalist mixed economy, the state intervenes in market activity and provides many services.
Other terms sometimes used for capitalism, include:
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The etymology of the word capital has roots in the trade and ownership of animals. The Latin root of capital is capitalis, from the proto-Indo-European kaput, which means "head", this being how wealth was measured—the number of heads in a person's livestock. The terms chattel and cattle itself also derive from this same origin.
The lexical connections between animal trade and economics can also be seen in the names of many currencies and words about money: fee (faihu), rupee (rupya), buck (a deerskin), pecuniary (pecu), stock (livestock), and peso (pecu or pashu) all derive from animal-trade origins.
Arthur Young first used the term capitalist in his work Travels in France (1792). Samuel Taylor Coleridge, an English poet, used capitalist in his work Table Talk (1823). Pierre-Joseph Proudhon used capitalist in his first work What is Property? (1840) to refer to the owners of capital. Benjamin Disraeli used capitalist in the 1845 work Sybil. Karl Marx and Friedrich Engels also used capitalist (Kapitalist) as a private owner of capital in The Communist Manifesto (1848).
Karl Marx and Friedrich Engels referred the capitalistic system (kapitalistisches System) to the capitalist mode of production (kapitalistische Produktionsform) in Das Kapital (1867). The word "capitalism" only appears twice in Volume I of Das Kapital, p.124 (German edition), and in Theories of Surplus Value, tome II, p.493 (German edition). However, the late 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. 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.
However, the first use of 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).
According to some historians, the modern capitalist system has its origin in the European "crisis of the fourteenth century," a conflict between the land-owning aristocracy and the agricultural producers, the serfs. Feudal arrangements inhibited the development of capitalism in a number of ways for both the serfs and the lords. Serfs were forced to produce for lords, enervating interest in technological innovation. Similarly, cooperation was discouraged by each serf's preoccupation with sustaining their own families. For their part, the lords used force to ensure they received sufficient food, and with no market or competition, felt little pressure to innovate. Finally, because lords expanded their power and wealth through military means, they spent their wealth on military equipment or on conspicuous consumption that helped foster alliances with other lords; there was no incentive to invest in developing new, productive technologies.
This arrangement was shaken by the demographic crisis of the fourteenth century. This crisis had several causes: agricultural productivity reached its technological limitations and stopped growing; bad weather led to the Great Famine of 1315-1317; the Black Death in 1348-1350 led to a population crash. These factors led to a decline in agricultural production. In response feudal lords sought to expand agricultural production by expanding their domains through warfare; they therefore demanded more tribute from their serfs to pay for military expenses. In England, many serfs rebelled. Some moved to towns, some purchased land, and some entered into favorable contracts to rent lands, from lords desperate to repopulate their estates.
The collapse of the manorial system in England created a class of tenant farmers with more freedom to market their goods and thus more incentive to invest in new technologies. Lords who did not want to rely on rents could buy out or evict tenant farmers, but then had to hire free-labor to work their estates – giving them an incentive in investing in production. This process was encouraged by the “enclosure movement”, which transferred public lands to large landowners, who used the land to graze sheep rather than produce crops. As England’s wool exports grew in the fifteenth century, the process of enclosure accelerated, forcing many tenant-farmers to give up farming and seek wage labor. According to Karl Marx, the rise of the contractual relationship is inextricably bound to the end of the obligatory relationship between serfs and lords. Marx characterizes this transformation as “the historical process of divorcing the producer from the means of production.” It was this “divorcing” that turned the serf’s land into the lord’s capital. According to Marx, this rearrangement led to a new division of classes:
Marx labeled this period the "pre-history of capitalism".
It was, in effect, feudalism that began to lay some of the foundations necessary for the development of mercantilism, a precursor to capitalism. Feudalism took place mostly in Europe and lasted from the medieval period up through the 16th century. Feudal manors were almost entirely self-sufficient, and therefore limited the role of the market. This stifled the growth of capitalism. However, the relatively sudden emergence of new technologies and discoveries, particularly in the industries of agriculture  and exploration, revitalized the growth of capitalism. The most important development at the end of Feudalism was the emergence of “the dichotomy between wage earners and capitalist merchants”. With mercantilism, the competitive nature means there are always winners and losers, and this is clearly evident as feudalism transitions into mercantilism.
The period between the 16th and 18th centuries is commonly described as mercantilism.  This period was associated with geographic discoveries by merchant overseas traders, especially from England and the Low Countries; the European colonization of the Americas; and the rapid growth in overseas trade. Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods. While some scholars see mercantilism as the earliest stage of modern capitalism, others argue that modern capitalism did not emerge until later. For example, noting the pre-capitalist features of mercantilism, Karl Polanyi argued that capitalism did not emerge until the establishment of free trade in Britain in the 1830s.
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 7th century, mercantilism spread rapidly to Spain, Portugal, Northern Africa, and Asia. Mercantilism finally revived in Europe in the 14th century, as mercantilism spread from Spain and Portugal.
Feudalism began to lay some of the foundations necessary for the development of mercantilism, a precursor to capitalism. Feudalism took place mostly in Europe and lasted from the medieval period up through the 16th century. Feudal manors were almost entirely self-sufficient, and therefore limited the role of the market. This stifled the growth of capitalism. However, the relatively sudden emergence of new technologies and discoveries, particularly in the industries of agriculture  and exploration, revitalized the growth of capitalism. The most important development at the end of feudalism was the emergence of “the dichotomy between wage earners and capitalist merchants”.
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…" Similar practices of economic regimentation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of the absolutism, the state superseded the local guilds as the regulator of the economy. During that time the guilds essentially functioned like cartels that monopolized the quantity of craftsmen to earn above-market wages.
At the period from the 18th century, the commercial stage of capitalism transcended from the previous domination of capitalism by merchants. Commercialism, or commercial capitalism, originated from the start of the British East India Company and the Dutch East India Company. These companies were characterized by their monopoly on trade, granted by letters patents. Recognized as chartered joint-stock companies by the state, these companies enjoyed a large sum of power, ranging from lawmaking, military, and treaty-making privileges. Characterized by its colonial and expansionary powers by states, powerful nation-states sought to accumulate precious metals, and military conflicts arose. 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.
By the late 18th century, mercantilism was in crisis: mercantile activity could not produce sufficient wealth to pay for the military expenditures of the states that protected, and depended on, commerce. This crisis intensified with the Industrial Revolution. Although mercantilist policies endured in European countries with weak industrial bases, such as Prussia and Russia, into the 19th century, rapidly industrializing countries began questioning the value of mercantilist policies by the late 18th century. This is most evident in Great Britain, the home of the Industrial Revolution, where a new group of economic theorists, led by David Hume 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.
At the same time that philosophers and politicians were debating the merits of mercantilism, the mid-18th century gave rise to an alternative set of economic relations and practices: industrial capitalism. Most scholars agree that the emergence of capitalism was made possible by earlier economic developments in England. According to Marxists, it was made possible by the exploitation of wage-labor on a large scale, which English landowners first experimented with after the crisis of the 14th century. According to World Systems Theorists like Immanuel Wallerstein, it was made possible by the accumulation of vast amounts of capital under the merchant phase of capitalism.
During the resulting Industrial Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, capitalism marked the transformation of relations between the British landowning gentry and peasants, giving rise to the production of cash crops for the market rather than for subsistence on a feudal manor. The surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture.
Marx dated industrial capitalism from the last third of the 18th century, marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routinization of work tasks; and finally established the global domination of the capitalist mode of production. In the midst of this newly developing concept of division of labor came exploitation of labor on a much larger scale than was ever seen before.
Britain also abandoned its protectionist policy, as embraced by mercantilism. In the 19th century, Richard Cobden and John Bright, who based their beliefs on the Manchester School, initiated a movement to lower tariffs. In the 1840s, Britain adopted a less protectionist policy, with the repeal of the Corn Laws and the Navigation Acts. Britain reduced tariffs and quotas, in line with Adam Smith and David Ricardo's advocacy for free trade. As noting the various pre-capitalist features of mercantilism, Karl Polanyi argued that capitalism did not emerge until the establishment of free trade in Britain in the 1830s. Other sources, however, argued that mercantilism fell after the repeal of the Navigation Acts in 1849,.
Due to companies legislation, however, British capitalism was not perceived by some as being exclusively laissez-faire. The British state created charters, creating immunites for the corporations under the Limited Liability Act 1855 and the Joint Stock Companies Act 1856. The British East India Company and controls in major industries during that time were also important examples of economic regulations. See List of Acts of Parliament of the United Kingdom Parliament, 1840-1859 and History of labour law in the United Kingdom.
Most of the early proponents of the liberal theory of economics in the United States subscribed to the American School. This school of thought was inspired by the ideas of Alexander Hamilton, who proposed the creation of the First National Bank and the Second National Bank and increased tariffs (e.g. tariff of 1828) to favor northern industrial interests. Following Hamilton's death, the more abiding protectionist influence in the antebellum period came from Henry Clay and his American System.
In the mid-19th century, the United States followed the Whig tradition of economic liberalism, which included increased state control, regulation and macroeconomic development of infrastructure. Public works such as the provision and regulation transportation such as railroads took effect. The Pacific Railway Acts provided the development of the First Transcontinental Railroad. In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872).
Following the American Civil War, the movement towards a mixed economy accelerated with even more protectionism and government regulation. In the 1880s and 1890s, significant tariff increases were enacted (see the McKinley Tariff and Dingley Tariff). Moreover, with the enactment of the Interstate Commerce Act of 1887, the Sherman Anti-trust Act, the federal government began to assume an increasing role in regulating and directing the country's economy.
In the late 19th century, the control and direction of large areas of industry came into the hands of financiers. This period has been defined as state capitalism, state monopoly capitalism, or corporate capitalism, characterized by the subordination of processes of production to the accumulation of profits in a financial system. 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. Increasingly, large industries and land became the subject of profit and loss by financial speculators.
From about the American Civil War to the early 20th century, capitalism has also been increasingly influenced by large, monopolistic corporations. The oil, 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. Although the concept of monopoly capitalism originated among Marxist theorists, non-Marxist economic historians have also commented on the rise of monopolies and trusts in the period.
By the last quarter of the 19th century, the emergence of large industrial trusts had provoked legislation in the U.S. to reduce the monopolistic tendencies of the period. Gradually, during this Progressive Era, the U.S. federal government played a larger and larger role in passing antitrust laws and regulation of industrial standards for key industries of special public concern. By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem. In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism’s long-term survival prospects. In the early 20th century, a succession of U.S. Presidents, beginning with Warren Harding's "Return to Normalcy," the state decreased taxation rates, with the Revenue Act of 1924 and 1926. This allowed for the prosperity of "The Roaring Twenties," but later was said to be largely responsible for the Great Depression. During the 1930s, Marxist commentators often posited the possibility of capitalism's decline or demise, often in alleged contrast to the ability of the Soviet Union to avoid suffering the effects of the global depression.
In the period following the global depression of the 1930s, the state played an increasingly prominent role in the capitalistic system throughout much of the world. In 1929, for example, total U.S. government expenditures (federal, state, and local) amounted to less than one-tenth of GNP; from the 1970s they amounted to around one-third (EB). Similar increases were seen in all capitalist economies, some of which, such as France, have reached even higher ratios of government expenditures to GNP than the United States. These economies have since been widely described as "mixed economies."
During the postwar boom, a broad array of new analytical tools in the social sciences were developed to explain the social and economic trends of the period, including the concepts of post-industrial society and the welfare state. The phase of capitalism from the beginning of the postwar period through the 1970s has sometimes been described as “state capitalism”, especially by Marxian thinkers. This era was greatly influenced by Keynesian economic stabilization policies.
The long postwar boom ended in the late 1960s and early 1970s, and the situation was worsened by the rise of stagflation. Exceptionally high inflation combined with slow output growth, rising unemployment, and eventually recession caused loss of credibility of Keynesian welfare-statist mode of regulation. Under the influence of Friedrich Hayek and Milton Friedman, Western states embraced policy prescriptions inspired by the 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 U.S. and Margaret Thatcher in the UK in the 1980s. Finally, the general public's interest shifted from the collectivist concerns of Keynes's managed capitalism to a focus on individual freedom and choice, called "remarketized capitalism."  In the eyes of many economic and political commentators, collapse of the Soviet Union supposedly brought further evidence of superiority of market capitalism over communism.
Although overseas 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. However, other thinkers argue that globalization, even in its quantitative degree, is no greater now than during earlier periods of capitalist trade. The roots of globalized capitalism can be traced back to the imperialism of the early 20th century. Imperialistic policies promoted the spread of capitalistic principles, and the doors of trade stayed open in foreign countries even after imperialism had come to an end.
After the abandonment of the Bretton Woods system and the strict state control of foreign exchange rates, the total value of transactions in foreign exchange was estimated to be at least twenty times greater than that of all foreign movements of goods and services (EB). The internationalization of finance, which some see as beyond the reach of state control, combined with the growing ease with which large corporations have been able to relocate their operations to low-wage states, has posed the question of the 'eclipse' of state sovereignty, arising from the growing 'globalization' of capital.
While scientists generally agree about the size of global income inequality, there is a general disagreement about the recent direction of change of it. However, it is growing within particular nations such as China. The book The Improving State of the World argues that economic growth since the Industrial Revolution has been very strong and that factors such as adequate nutrition, life expectancy, infant mortality, literacy, prevalence of child labor, education, and available free time have improved greatly.
The biggest reason for the increasingly global capitalist economy is the telecommunications revolution that has taken place over the last twenty years. Fax machines, cell phones, and the internet have made it possible for work to be done and transactions to take place from almost anywhere in the world.
In 2008, state intervention in global capital markets by the American and other governments was seen by many as signaling a crisis for free-market capitalism. Serious turmoil in the banking system and financial markets due in part to the subprime mortgage crisis reached a critical stage during September 2008, characterized by severely contracted liquidity in the global credit markets and going-concern threats to investment banks and other institutions. 
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.
Adam 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. 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. 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. 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.
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. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.
While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public goods. 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.
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. 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. ]] 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. 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, in order to survive, to sell their labor for a living wage. 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. 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" - in order to find new markets and resources, representing the last and highest stage of capitalism. Some 20th century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive. 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.
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. 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.
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). 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, 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.
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. 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.
[[File:|thumb|left|Ludwig von Mises]]
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. They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist doctrines of mercantilism with capitalism.
Austrian economics has been a major influence on the ideology of libertarianism, which considers laissez-faire capitalism to be the ideal economic system. Murray Rothbard, who founded the Center for Libertarian Studies and the Journal of Libertarian Studies, is referred to as the father of Libertarianism in the United States. He was associated with the 1982 creation of the Ludwig von Mises Institute and later was its academic vice president. In 1987 he started the scholarly "Review of Austrian Economics," now called the Quarterly Journal of Austrian Economics. Rothbard coined the term "Anarcho-capitalism".
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 which 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. 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. 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.
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, rather than privileging particular social actors; 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 tantamount to Smith’s argument that self interest in turn benefits the whole of society. 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. 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.
Neoclassical economists, today the majority of economists, 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.
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. While the measurements are not identical, 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. 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. 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.
Milton Friedman has 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.
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.
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.
Ayn Rand was a prominent philosophical supporter of laissez-faire capitalism; her novel Atlas Shrugged was an influential publications on the subject of business and continues to be a best-seller. The first person to endow capitalism with a new code of morality (Rational Selfishness), she did not justify capitalism on the grounds of pure "practicality" (that it is the best wealth-creating system), or the supernatural (that God or religion supports capitalism), or because it benefits the most people, but maintained that it is the only morally valid socio-political system because it allows people to be free to act in their rational self-interest. These thinkers have had a substantial influence on the Libertarian Party. The Libertarian Party strongly advocates the elimination of most, if not all, state involvement in the marketplace. The Republican Liberty Caucus is the libertarian branch of the Republican Party.
Notable critics of capitalism have included: socialists, anarchists, communists, some forms of conservatism, Luddites, Narodniks, some schools of nationalism and Shakers. Marxism advocated a revolutionary overthrow of capitalism that would lead to socialism before eventually transforming into communism after class antagonisms and the state ceased to exist. Marxism influenced social democratic and labour parties as well as some moderate democratic socialists, who seek change through existing democratic channels instead of revolution, and believe that capitalism should be heavily regulated rather than abolished, supplementing the market economy with a mixed economy. 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. The first socialists drew many of their principles from Christian values, against "bourgeois" values of profiteering, greed, selfishness, and hoarding. Some Christian critics of capitalism may not oppose capitalism entirely, but support a mixed economy in order to ensure adequate labor standards and relations, as well as economic justice. Indian philosopher P.R. Sarkar, founder of the Ananda Marga movement, developed the Law of Social Cycle to identify the problems of capitalism and proposed the Progressive Utilization Theory (PROUT) as a solution to its ills.
Critics argue that capitalism is associated with: unfair and inefficient 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; repressions of workers and trade unionists, and phenomena such as social alienation, inequality, unemployment, and economic instability. Critics have argued that there is an inherent tendency towards oligolopolistic structures when laissez-faire is combined with capitalist private property. Capitalism is regarded by many socialists to be irrational in that production and the direction the economy is unplanned, creating many inconsistencies and internal contradictions.
In the early 20th century, Vladimir Lenin argued that state use of military power to defend capitalist interests abroad was an inevitable corollary of monopoly capitalism. Economist Branko Horvat states, "it is now well known that capitalist development leads to the concentration of capital, employment and power. It is somewhat less known that it leads to the almost complete destruction of economic freedom." Southern Methodist University Economics Professor Ravi Batra argues that excessive income and wealth inequalities are a fundamental cause of financial crisis and economic depression, which will lead to the collapse of capitalism and the emergence of a new social order.
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. Murray Bookchin has argued that capitalist production externalizes environmental costs to all of society, and is unable to adequately mitigate its impact upon ecosystems and the biosphere at large. Labor historians and scholars, such as Immanuel Wallerstein, Tom Brass and latterly Marcel van der Linden, have argued that unfree labor — by slaves, indentured servants, prisoners, and other coerced persons — is compatible with capitalist relations.
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. 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.
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. 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. 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, while it has been observed[who?] that many democratic societies such as the Bolivarian Republic of Venezuela and Anarchist Catalonia have been expressly anti-capitalist. 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 further indicates that capitalist democracies rarely make war with one another and have little internal violence. However critics of the democratic peace theory note that democratic capitalist states may fight infrequently or never with other democratic capitalist states because of Political similarity or political 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. Under this line of thinking, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.
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 Index 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.
Although the term "liberalism" retains its original meaning in most of the world, it has unfortunately come to have a very different meaning in late twentieth-century America. Hence terms such as "market liberalism," "classical liberalism," or "libertarianism" are often used in its place in America.
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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First used by novelist William Thackeray in 1854 to mean "owners of capital", within a few years was being used by both Pierre Proudhon and Karl Marx as a pejorative for property-based, free market economics. Eventually caught on to widespread use politically, whether seen as good or bad.
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.)
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.
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.
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.
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.