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Capitalism generally refers to:

Etymology

The lexical roots of the word capital reveal roots in the trade and ownership of animals. The Latin root of the word capital is capitalis, from the proto-Indo-European kaput, which means "head", this being how wealth was measured. The more heads of cattle, the better. The terms chattel (meaning goods, animals, or slaves) and even 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.

Although he is often described as the "father of capitalist thinking," Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty." However, Smith defined "capital" as stock, and "profit" as the just expectation to keep the revenue from improvements to that stock. Smith also made capital improvement the central goal of the economic and political system.[1]

The first use of the word "capitalism" in English is by Thackeray in 1854, by which he meant having ownership of capital. In 1867 Prudhon used the term "capitalist" to refer to owners of capital, and Marx and Engels refer to the "Capitalist production system" and in Das Kapital to "kapitalistische Produktionsweise", which does not translate to "capitalism", but "capitalist mode of production". The word "capitalism" only appears twice in "Das Kapital", namely in tome II, p.124 (German edition) and in Theories about Surplus Value, tome 2 p.493 (German edition). However, the late Engels made more frequent use of the term "capitalism". They also consistently use the word "capitalist" to mean the private owners of the means of production. By the early 20th century the term had become widespread, as evidenced by Max Weber's use of the term in his The Protestant Ethic and the Spirit of Capitalism in 1904, and Werner Sombart's 1906 Modern Capitalism. The OED cites the use of the term "private Capitalism" by Karl Daniel Adolf Douai, German-American Socialist and Abolitionist in the late 19th century, in an 1877 work entitled "Better Times", and a citation by an unknown author in 1884 in the pages of Pall Mall magazine.

Capitalism as an economic system

Capitalist pyramid (Anti-capitalist propaganda)

There is much debate over how to define capitalism. Some proponents of capitalism (like Milton Friedman) emphasize the role of free markets, which, they claim, promote freedom and democracy. For many (like Immanuel Wallerstein), capitalism hinges on the elaboration of an economic system in which goods and services are traded in markets, and capital goods belong to non-state entities, onto a global scale. For others (like Karl Marx), it is defined by the creation of a labor market in which most people had to sell their labor-power in order to survive. As Marx argued (see also Hilaire Belloc) capitalism is also distinguished from other market economies with private ownership by the concentration of the means of production in the hands of a few. Marx defines "capital" as money and "capitalist production" as the use of money to denominate wealth in money terms, a meaning which referes to John Stuart Mill's definition of value in a market economy as being the going price for a good or service.

The first theorist of what we refer to as capitalism is generally thought to be Adam Smith. His 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, theorized that within a stable system of commerce and evaluation, individuals would respond to the rewards of earning more by specializing their production. These individuals would naturally, without specific state intervention, "direct ... that industry in such a manner as its produce may be of the greatest value." This would mean that the whole economy could produce more, and would therefore be wealthier. His systematic treatment of how exchange of goods, or a market, would create incentives to act in the general interest became the basis of what was then called political economy and later economics. It was also the basis for a theory of law and government which would gradually supercede the mercantilist regime then in place. Smith argued that protecting particular producers would lead to inefficient production, and that a national hoarding of specie would only increase prices, in an argument similar to that of David Hume.

Over the course of the next century, there would be a gradual movement in Europe and the states founded by Europeans, to reduce trade barriers, specific restrictions on production and labor, localized weights and measurements, restraints in forming new businesses and royal perogatives in interfering with the operation of commerce. Two doctrines grew up to describe this process. One was the legal doctrine that the proper owner of land or a right was the one who could make best economic use of it, enshrined in property law. The other was the political doctrine of "laissez-faire" economics, namely that all coercive government regulation of the market is unjustified "interference" and that economies would perform best with government only playing a defensive role to insure the operation of free markets.

When speaking of critics of capitalism, it is generally thought that the most lasting and thorough critique of the results of capitalism orginates with Karl Marx. According to Karl Marx, the treatment of labor as a commodity led to people valuing things more according to their price rather than their usefulness (see commodity fetishism) and to an expansion of the system of commodities. Marx observed that some people bought commodities in order to use them, while others bought them in order to sell elsewhere at a profit. Much of the history of late capitalism involves what David Harvey called the "system of flexible accumulation" in which more and more things become commodities, the value of which is determined by their exchange rather than by their use. Thus not only are pins commodities; shares of ownership in a factory that makes pins become commodities; then options on shares of stock become commodities; then portions of interest rates on bonds become commodities, and so on. The predominance of commodity speculation in modern capitalism very much shapes its results.

The next major revision to the theory of capitalism began occuring in the late 19th century with the expansion of corporations, finance, globalization of production and markets, and the increasing desire to tap the productive capacity of the capital sectors of the economies in order to secure markets and resources with which to continue economic growth. The state became seen by many, particularly the wealthy, as a vehicle for improving business conditions, securing markets, and gaining access to scarce materials, even if this required military force. This philosophy would reach a pinnacle in the 1920's with President Calvin Coolidge's declaration that "the business of America is business". Critics of this period label it "corporatism", while adherents generally regard it as an extension of "laissez-faire" principles of natural liberty.

Example of Starting a Business

The following example introduces many of the ideas involved in capitalism. When starting a business, the initial owners typically provide some money (the Capital) which is used by the business to buy or rent some means of production. For example, the enterprise may buy or rent a piece of land and a building; it may buy machinery and hire workers (labor-power). The commodities produced by the workers become the property of the capitalist, and are sold by the workers on behalf of the capitalist. The money from sales also becomes the property of the capitalist. The workers deposit the money into the capitalist's bank account. Once the capitalist receives this money, he or she pays the workers a portion for their labor, pays other overhead costs, and keeps the rest as profit. If more money is needed than the initial owners are willing or able to provide, the business may to borrow a limited amount of extra money with a promise to pay it back with interest -- in effect it may rent more capital. The business is granted a degree of legal authority, and control, over a set of factors of production (as economists call them). The business can register as a corporate entity, meaning that it can act as a type of virtual person in many matters before the law (see Companies for listing of such entities). The owners can pay themselves some of the income derived from the business (Dividends), sell shares of stock in the company, or they can sell all of the equipment, land, and other assets, and split the proceeds between them.

Traditionally, capitalist economies have had corporations working along the lines of the above example existing in parallel with other types of organisation such as governments, sole traders, partnerships and sometimes cooperatives, credit unions, and other entities. Observers do not always agree which of these organisations, or which features of them are part of capitalism, although most often companies, or many features of their operation, are included as part of the definition.

Additionally, many of the characteristics and techniques of business workings in the above example existed before capitalism, and many have continued to be added. So this leaves much room for debate. However, many people agree that it was around the time when share-trading in corporate bodies became common and widely understood that capitalism can be said to have begun, even though there is often disagreement that it was the share-trading itself that defined capitalism. Such share trading first took place widely in Europe during the 17th century and continued to develop and spread thereafter, although the word "capitalism" itself did not come into use until the 19th century.

One can view shares as converting company ownership into a commodity - the ownership rights are divided into units (the shares) for ease of trading in them. In a similar way, one can view bonds as a commoditisation of debt. Other financial instruments have come into being since the early years of capitalism that have commoditised fluctuations in markets, future prices, classes of items, and many other things. Increases in communications technologies have helped facilitate an increase in the number and availability of financial instruments, and the ease of trading.

In the bulk of capitalist economies, a predominant proportion of productive capacity has belonged to corporate bodies such as companies. Therefore, to a large degree, authority over productive capacity has resided with the owners of companies. Within legal limits and the financial means available to them, the owners of each company can decide how it will operate. This normally includes deciding the following things (among many others):

  • which land production will take place on,
  • how many people to employ,
  • what activities employees will do,
  • which machines and tools to use for production.

In larger companies, authority is usually delegated in a hierarchical or bureaucratic system of management. When company ownership is spread among many shareholders, the shareholders generally have votes in the exercise of authority over the company in proportion to the size of their share of ownership.

Importantly, the owners receive any profits or proceeds generated by the productive capacity that they own - sometimes in the form of dividends, other times in the form of profits being re-invested in the capacity that is owned (and "capital gains"). The price at which ownership of productive capacity sells is generally in rough proportion to the profits currently being generated and/or expected to be generated by that productive capacity in the future. There is therefore a financial incentive for owners to exercise their authority in ways that increase the productive capacity of what they own. Various owners are motivated to various degrees by this incentive -- some give away a proportion of what they own, others seem very driven to increase their holdings. Nevertheless the incentive is always there, and it is credited by many as being a key aspect behind the remarkably consistent growth exhibited by capitalist economies. Meanwhile, some critics of capitalism claim that the incentive for the owners is exaggerated and that it results in the owners receiving money that rightfully belongs to the workers, while others point to the fact that the incentive only motivates owners to make a profit - something which may not necessarily result in a positive impact on society.

Which Economies are "Capitalist" ?

In mainstream economics, a capitalist economy is one where the overwhelming majority of production and consumption is private and is handled through a free market that includes free enterprise. However, exactly where to draw the line in labeling economies is a matter of some debate.

Some believe that it is inaccurate to call any of the major industrialized economies "capitalist" because of the level of government intervention (see statism) into what would otherwise be a free market. For example, some assert that the economy of the United States of America is significantly less than "free", and that therefore it is more appropriately termed a mixed economy that is merely skewed more toward capitalism than most national economies, rather than being a true representation of capitalism. Still others might say that the U.S. economy is capitalist, but the U.K. economy is a "mixed economy," and so on, depending upon their perception of how much economic freedom exists in those locales.

Many Greens, Marxists and anti-Globalists agree that the governments of the major industrial economies are not serving in the role of protecting "the free market", but would go on to say that these governments are, in fact, acting to protect the owners of capital and corporations as their first priority, sometimes expressed as "socialism for the rich, capitalism (cut throat competition) for the poor." These critics, therefore, would assert that the correct term for the core industrial nations is neither capitalism, nor mixed economy, but corporatist. Libertarians and other free-market advocates may also share this opinion regarding some or all of the major economies.

Nevertheless, mainstream economists, for their part, admit that the present economic systems have diverged from earlier forms labeled "capitalism", and many believe that some of the modern economies are still best described as being "capitalism" rather than "mixed economy" or "corporatist."

Characteristics of capitalist economies

Despite wide disagreements over the precise definition of capitalism, and arguments over which economies are capitalist and to what degree, a set of broad characteristics of the Private sector of an economy are generally agreed on by both advocates and critics of capitalism. These are capital accumulation and specialization or Economic growth, changing levels of individual wealth and income or Economic mobility, unequal distribution of wealth, Entrepreneurial networks and social arrangements, and the existence of a labor market with its attendant unemployment.

Economic growth

One of the primary objectives of establishing a system by which commerce and property have a central role in the society is to promote the accumulation of capital. The measurements for "growth" are Gross Domestic Product or GDP, capacity utilization, and "standard of living".

The ability of capitalist economies to sustainably increase and improve their stock of capital was central to the argument which Adam Smith advanced for having a free market set production, price and resource allocation.

Economic growth, however, is not universally agreed on, nor is it universally seen to be an unequivocal good. Growth's down sides are, within the discipline of economics, referred to as "externalization of costs" (see externalization). These include pollution, disruption of traditional living patterns and cultures, spread of pathogens, wars over resources or market access, the creation of underclasses, among others. In defense of capitalism, philosophers such as Isiah Berlin have pointed out that all of these ills are neither unique to capitalism, nor are they inevitable results of it.

Economic Mobility

One of the key signs entrepreneurial economies, and of "growth" is economic mobility - expressed as a large change in the socio-economic strata. The way this is measured is by large changes in the populations in the various deciles or quintiles of income and wealth, and large changes over a person's lifetime in real wage earning power. In standard economics, a capitalist system provides more opportunities for an individual to rise faster in the world by entering new professions, or by forming a business venture. The instability of economic strata is contrasted with traditional feudal or tribal societies that are thought to have more stable relationships of wealth and with egalitarianism in socialist societies which distribute more of the wealth in social benefits, and therefore reduce the income mobility, particularly of those who own capital and wish to sell it.

Large turnover in the population of income deciles, however, does not always represent income mobility - with individuals having regular increases in wages over their life and then retiring, population change alone, does not show that there is "mobility" per se. More over, it is argued by many labor economists that instability of working wages represents the moving of risk on to workers and into particular sectors such as agriculture, and off of holders of capital.

Distribution of wealth

Capitalist economies have shown an uneven distribution of wealth. Typically between 0.5% and 1% of people own more than half of productive capacity, if not half of all wealth. Various studies have shown distributions with the peak in the distribution at or near zero with fewer people owning progressively higher wealth. Common mathematical models of such distributions include power-law distributions, exponential distributions, and mixtures of the two. In these distributions some people own hundreds of thousands, or sometimes millions of times more than average.

The distribution of wealth in capitalist economies is one of its most contentious issues. To properly visualise the shape of these distributions it is useful to imagine what it would be like if some other commonly known characteristic of people were to be distributed this way. If height were distributed in the same way as wealth with the same average height as now, most people would be under 1 meter (3 feet) tall, but you would still see people 100 kilometers (60 miles) tall, if you could see up that far, and the wealthiest would rise well into space.

This seems to strike many people as being unfair and/or dysfunctional, while others don't see it as a problem.

Arguments directed against unfairness or dysfunctionality have a tendency to go roughly as follows: Most characteristics of people, such as height or weight, and it might be surmised people's ability to be productive, are distributed according to a bell shaped curve (standard normal distribution) with a peak at the average and few people far on either side. For example, there are very few people who are twice as tall as average, or who can run twice as fast, or have twice as high an IQ. The fact that capitalism doesn't distribute wealth in a similar fashion must mean either that people do not realize their full productivity under capitalism, or that an untamed capitalist system is not a pure meritocracy due to inherent biases favoring those who already possess greater resources. Thus they accumulate more wealth for themselves in a cyclical fashion (as the old statement goes, "the rich get richer").

People who don't see uneven wealth distribution as a problem tend to argue that it is associated with, or a byproduct of, the overall increase in total wealth, and often argue that so long as a high proportion of people have enough wealth to live above a minimum standard, the distribution of the remaining wealth may as well be left alone.

Another problem with using "distribution of wealth" as a standard to measure economic systems is that such a standard can produce seemingly irrational judgments. Under the "distribution of wealth" standard, a system where everyone has nothing is judged as equal to a system where everyone has enormous wealth since the distribution of wealth in the two systems is equal. Furthermore, there is Robert Nozick obvious objection that no condition of perfect equality could be maintained for very long. If all agents possess the same amount of wealth, they will immediately begin investing it in different ventures which will pay off to varying degrees. Within moments of the first trade, then, inequality would be restored.

Disputes over this issue become entangled with disputes over the roles of cities vis-a-vis their rural supply regions. Jane Jacobs, for example, has expounded a theory that is ambivalent on capitalism-versus-communism disputes, but holds in essence that the dynamism of a city is essential for any lasting wealth.

In "Cities and the Wealth of Nations" (1984), for example, she argued that development aid to regions without capital-generating cities of their own is generally wasted, adducing examples from the rural south of the United States in the wake of the Tennessee Valley Authority to Iran under the Shah.

Free market theories are often used in which voluntary economic exchange is seen as leaving both parties better off as both would not be trading unless the outcome of the trade was an improvement for both. According to this view, even if the resulting distribution is not even, at least it is better than if there were no trading.

Another outlook that downplays the blame of capitalism for disparities in wealth distribution is that economic systems are not even the main culprit. The economist Thomas Sowell has attributed factors such as geography, climate, culture, and natural resources as primary reasons for inequity. Alternatively, the claim is made that capitalist economics is not a zero-sum game and that wealth is not "distributed", but actually "created" through innovation, and risk-taking. The writer P.J. O'Rourke has explained this view by comparing the alternative perspective to a pizza where people taking too many slices leaves somebody with just the box. By this way of thinking, the "pizza" (or zero-sum) model of wealth is a drastic oversimplification. In response, critics of capitalism have argued that even if these arguments could justify some economic inequity, they cannot explain the extreme inequality that capitalism brings with it.

Other points of view on capitalism's wealth distribution include:

  • Pro-Capitalist:
    • Collection of wealth in relatively few hands serves a function that in the end benefits all. (see philanthropist)
    • Capitalist economies allocate wealth to the rich because they deserve it (see wealth).
    • Society requires that they have it as an incentive, or for any number of reasons (see motivation).
    • The cause of poverty is the insufficient application of capitalist principles.
    • Capitalism hasn't been properly implemented yet.
    • Present wealth distribution is the only possible outcome of capitalism.
    • Financial markets and banks where most wealth is stored act as a means of redistribution of wealth (see banking and stock market). Some say that this causes the simple dollar amounts assigned to a persons "net worth" to be completely misleading and inflated.
  • Anti-Capitalist:
    • Wealth is not beneficial to anyone - not even the wealthy.
    • Perhaps government interference in markets protects the wealthy.
    • Uneven distribution of wealth shows capitalism to be faulty, or immoral.
    • Many people have little wealth left over after living expenses, so they can't make it grow quickly.
    • Wealth is defined and judged incorrectly, in many different ways.

While it may be debated as to whether capitalism causes the uneven distribution of wealth in capitalist economies, or whether it is good or bad, it is clear that capitalist economies do have uneven wealth distributions.

Evolving network structure

Capitalist economies have large numbers of companies and people free to enter into many types of arrangements with each other. The economy reacts to various changes in technologies, discoveries, and other situations, by means of companies and individuals re-assessing their arrangements with each other. Therefore, the control mechanisms of the economy, and the way that information flows through it, evolve over time, and are subject to a kind of "survival of the fittest" form of selection not unlike biological entities. Analysis of the networks of connections and arrangements in the economy has shown a degree of similarity to other networks such as the phone system or the Internet. [2] has examples of networks of company board members. Networks of customer links, and monetary flows exhibit similar structures.

Some see the evolution of capitalist economies as a positive adaptation and tendency towards improvement. Others see it as pointless random and chaotic fluctuations. If economic practices can be mapped to a fitness landscape in which optimization of the distribution of wealth is evolved then both viewpoints are valid, since random and chaotic fluctuations could be viewed as mutations. It is possible that capitalism is a local optimum or maximum, but this is dependent on the valuation of the goals for the distribution of wealth, such as the goodness of equal distribution or the reduction of waste.

Unknown/unapproved direction of capitalist economies

While there is a great deal of planning within companies and other organisations in capitalist economies, there is no economy-wide direction, or even any reliable prediction or knowledge of how the economy will behave or perform more than a year into the future. While nearly all transactions may be approved of and planned by the people taking part, many society-wide phenomena emerging from the transactions or markets are often not planned, predicted, or approved or authorised by anyone. A common feature in modern capitalist economies is for the State to maintain a certain degree of economic planning in order to stop huge economic fluctuations and additionally to give capitalist economies more longer-term aim.

Unemployment/employment

Since individuals typically earn income through finding a company for which to work, it is possible that not all individuals will be able to find a company that will want their labor at a given time. This would not be such a big problem in an economy in which individuals had access to the resources to provide for themselves, but when ownership of the bulk of productive resources is collected in relatively few hands, most individuals are made dependent on employment for their well being. It is normal that all real capitalist economies have fluctuating unemployment rates typically between 3 and 15%. Some economists have used the term the "natural rate of unemployment" to describe this situation. Occasionally unemployment rates have reached levels of 30%, and occasionally they have fallen to 2 or 1%, but rarely is there enough employment for all. Some economists consider a certain level of unemployment to be necessary for capitalist economies to function. Some political figures have claimed that the "natural rate of unemployment" shows the inefficiencies of a capitalist economy, since not all resources, human labor in this case, are efficiently allocated.

Criticisms of capitalism

Marxists and others criticize capitalism for enriching capitalists (owners of capital) at the expense of workers without necessarily working themselves ("the rich get richer, and the poor get poorer"), and for the degree of control over the lives of workers enjoyed by owners. Supporters of capitalism counter this criticism by claiming that ownership of productive capacity provides motivation to owners to increase productive capacity and so generally increase the average material wealth ("we all get richer"). Opponents of capitalism counter this by pointing out that the average inflation-adjusted hourly wage in the United States is below what it was 35 years ago and by pointing out that the First World has gotten richer primarily at the expense of the Third World.

Marxists believe that the capitalism allows capitalists - the owners of capital - to exploit workers. The existence of private property is seen as a restriction on freedom. Marxists also argue that capitalism has inherent contradictions that will inevitably lead to its collapse. Capitalism is seen as just one stage in the evolution of the economy of a society.

Marxists also often argue that the structure of capitalism necessarily leads to unjust exploitation of workers, regardless of whether or not the political system is one of an elected democracy. For this reason Marxists typically emphasise the capitalist economic system of Western countries rather than the democratic political system. A capitalist system is an economic system - although often associated with democratic political systems, they are independent from each other. Capitalist systems have often functioned under unelected governments, some examples being Hong Kong, Singapore, and Chile under the rule of General Pinochet.

In mainland China differences in terminology sometimes confuse and complicate discussions of Chinese economic reform. Under Chinese Marxism, which is the official state ideology, capitalism refers to a stage of history in which there is a class system in which the proletariat is exploited by the bourgeoisie. In the official Chinese ideology, China is currently in the primary stage of socialism with Chinese characteristics. However, because of Deng Xiaoping's dictum to seek truth from facts, this view does not prevent China from undertaking policies which in the West would be considered capitalistic including employing wage labor, increasing unemployment to motivate those who are still working, transforming state owned enterprises into joint stock companies, and encouraging the growth of the joint venture and private capitalist sectors.

Capitalism and imperialism

J.A. Hobson, a British liberal writing at the time of the fierce debate on imperialism during the Boer War, observed the spectacle of the Scramble for Africa and emphasized changes in European social structures and attitudes as well as capital flow, though his emphasis on the latter seems to have been the most influential and provocative. His so-called accumulation theory, extremely influential in its day, suggested that that capitalism suffered from under-consumption due the rise of monopoly capitalism and the resultant concentration of wealth in fewer hands, which apparently gave rise to a misdistribution of purchasing power. This argument calls attention to Europe's huge, impoverished industrial working class, which was typically far too poor to consume the goods produced by an industrialized economy. His analysis of capital flight and the rise of mammoth cartels later influenced Lenin in his book Imperialism: The Highest Stage of Capitalism, which has become a basis for the neo-Marxist analysis of imperialism.

Although Hobson's works are still read, it is now widely acknowledged that his analysis had neglected the mediating impact of a free-floating interest rate on the accumulation of unused capital. His causal economic relation between capitalism and imperialism, then, ultimately fails, although his discussions of capitalism's cultural impacts may remain valid.

Contemporary World-Systems theorist Immanuel Wallerstein perhaps better addresses Hobson's counterarguments without degrading Hobson's underlying inferences. Wallerstein's conception of imperialism as a part of a general, gradual extension of capital investment from the center of the industrial countries to an overseas periphery thus coincides with Hobson's. According to Wallerstein, Mercantilism became the major tool of semi-peripheral, newly industrialized countries such as Germany, France, Italy, and Belgium. Wallerstein hence perceives formal empire as performing a function analogous to that of the mercantilist drives of the late seventeenth and eighteenth centuries in England and France. The expansion of the Industrial Revolution hence contributed to the emergence of an era of aggressive national rivalry, leading to the late nineteenth century scramble for Africa and formal empire.

Capitalism as an ideology

As with many common words, and most particularly ideologically laden words, "capitalism" has many meanings. There can be great confusion amongst these meanings, and readers must be careful of which meaning a writer intends in any particular usage.

"Capitalism" defined as the system of the private ownership of capital goods, is distinct from "capitalism" as an ideology, that is the philosophical advocacy of that system. Of course, the precise ideology meant by "capitalism" in the latter sense differs: what a Marxist or Green may describe as capitalist ideology may seem thoroughly alien to what an advocate of laissez-faire liberalism means capitalism as an ideology.

Some argue that capitalism as a system and capitalism as an ideology go hand in hand. This view is often founded upon the Marxist idea that ideology is largely a consequence of underlying economic realities -- or the simplification of that idea which holds that people favor ideologies which justify their behavior or privilege. This viewpoint is often held by liberals, who regard an "open society" as necessary for capitalism, and economic freedom as being essential for an open society.

Whether capitalism is, as Marx held, the natural ideology of the class of business owners, capitalists, is itself controversial. Indeed, Adam Smith looked on the tradesman class with suspicion, and warned that they would engage in attempts to fix prices, gain government monopolies, or attempt to stiffle competition. David Riccardo defined the rent collecting class as "parasitic", producing no "value".

Business corporations have frequently favored forms of mercantilism, under which the state supports domestic business against foreign interests. Mercantilism is usually not identified as a form of capitalism, though many nations engage in mercantilist policies from time to time even if nominally capitalist in their ideology.

Modern Japanese capitalism after World War II might be seen as capitalist mercantilism, while the European mercantilism of the period before 1600 or so has been seen by some economic historians as being pre-capitalist. Further, Austrian school economists regard mercantilist policies as an interference with free-market capitalism.[3] For them, "capitalism" by definition involves free markets and free markets by definition involve free trade and free enterprise, which are two aspects of the economy that mercantile policies seek to regulate: both what can be imported, and what areas of development receive capital support.

Since capitalism is a word which is considered both an epithet and a compliment, and because of the diversity of both ideology and theory involved, the use of the word often reduces to, alternately a straw man or a shibboleth, used to damn or justify almost any imaginable policy choice or social arrangement.

Capitalism and political ideologies

Some political ideologies make support of their notion of capitalism crucial to their identity, these groups might, or might not support other ideologies laying claim to capitalism:

  • Libertarianism, which can be considered a branch of classical liberalism, defends a capitalist free market with minimal state intervention. (See laissez-faire.) Minarchist libertarians see the role for government in the economy as solely defending the rights of the participants against violence, theft, fraud, and damages such as pollution.
  • Anarcho-capitalists see no role for government whatsoever. They believe that all government functions, including physical security and the adjudication of commercial disputes, will be better achieved by market mechanisms, such as mercenary armies and private arbitration.
  • Objectivism argues that from the individual's standpoint, the only moral economic system is true capitalism, since capitalism itself can never come to exist without free men who act rationally and within the bounds of their unalienable, and rationally derived, rights.
  • Conservatism varies depending between countries in its specific stances. In Western nations, conservatives often defend the status quo of capitalist practices. These are often called business conservatives. Many people who call themselves politically conservative, however, prefer a government-regulated capitalism (sometimes called "mercantilism") over free-market capitalism. According to them, free-market capitalism disrupts traditional ways of life and what they often call "family values". Thus, others might classify conservatives as being in favor of a mixed economy.
  • Fascism is often an anti-Marxist ideology, which argues that it is defending capitalism from take over by socialist or bolshevik forces. Many supporters of "capitalism" as a liberating ideology would vehemently exclude such parties and governments from the definition of "capitalist", prefering terms such as "totalitarian", "closed society" or "corporatist". However pro-business conservative parties have, at various times, supported fascist states, coups or dicatorships in preference to communist or soviet systems, even to the point of backing coups against democratically elected governments, for example Pinochet's Chile, or Neville Chamberlain's preference for Nazi Germany over the Soviet Union. Former ministers of such governments are often the guests of such libertarian think tanks as the American Enterprise Institute and the Cato Institute.
  • Liberalism because of the broad application of the word, not every "liberal" party makes support for unrestricted laissez-faire capitalism part of its ideology. However, most liberal parties over the course of the 20th century, have made continuance of capitalism as the central part of the economy a primary objective, and have made free trade a centerpiece of their economic programs. In many contexts liberalism is synonymous with reduction in regulations, trade barriers and state monopolization, and liberalization the political and economic process of accomplishing these goals. Again the applicability is context dependent.

Some ideologies explictly favor a mixed economy:

  • Dirigisme defends a mostly free market within the nation, but proposes state intervention so as to direct the industry into directions of higher priority, or so as to make it more efficient.
  • Social democracy argue for extensive state regulation and partial intervention in an otherwise capitalist economy. Social democrats occupy a position between socialists and classical liberals with regards to economic matters. They see a need for government to regulate employment, trade, and labor, and sometimes favor nationalization of certain industries. This view is also held by some liberal parties, particularly in regard to natural monopolies and public goods. See also welfare state.
  • Distributism desires an economy with private property and with almost all people possessing a means of production. This would take place in for example a country of subsistence farmers. In a distributist economy, laws would be made to restrict large corporations from taking over. Distributists favor achieving these goals not primarily through government regulation, but firstly through grass roots efforts and collaboration.
  • Fascism can also mean establishing a "war economy": a state-controlled capitalist economy with powers delegated to capitalist interests subservient to a militarized central government. Socialists sometimes describe modern capitalism as "fascist", meaning an analogy to historical fascism with its cooperation (or cronyism) between industry and government. (See Militarism)

Some ideologies oppose capitalism and support a collectively run economy:

  • Socialism argues for greater public control of the economy, under a more extensive kind of democracy than is usually seen in capitalism. Areas of private ownership may remain in certain sectors (such as small businesses) under socialism, but most economic sectors are run by the state for the benefit of the populace at large. In particular, the state is to control the "commanding heights" of the economy, such as the banking system and the major industries.
  • Communism goes farther in the direction of government and/or social control of production, which calls for the overthrow, democratically or by revolution, of the capitalist system and the establishment of public ownership of the means of production. Communists see socialism as a stage towards the establishment of a stateless and classless economy. Historical Soviet Communism, a system of Party-controlled dictatorship (sometimes referred to as "Stalinism"), is distinct from the Communist ideal.
  • Anarchism strives for the immediate abolition of both the state and private property, and the establishment of a communal society quite similar to the one advocated by marxists as their final goal (but in contrast to the marxists, anarchists oppose the idea of a transitional socialist stage).

Arguments for and against capitalism

Since there are so many divergent ideologies backing or fighting capitalism, there is no possible agreed upon argument list for or against it. Each of the above ideologies makes very different claims for or about capitalism. Some ideologies refuse to use the word at all.

There seem to be at least five separate and distinct questions about capitalism which have clearly survived the 20th century and remain hotly debated today. Certain thinkers claim or claimed to have simple answers to these questions, but political science generally sees them as scales or shades of grey:

Is capitalism moral? Does it encourage traits and behaviors we find virtuous or proper in human beings? Can a successful participant in a capitalist economy also be a moral or virtuous person? Yes: Ludwig von Mises, Ayn Rand, Robin Hanson No: John McMurtry, Karl Marx, Vladimir Lenin

Is capitalism ethical? Can its rules and contracts and enforcement systems be made wholly objective of the people administering them, to a greater degree than other systems? Is it compatible with the rule of law? Yes: Buckminster Fuller, John McMurtry, Friedrich Hayek No: Karl Marx, Peter Kropotkin, Vladimir Lenin

Is capitalism efficient? Given whatever moral purposes or ethical standards it might serve, can it be said to allocate energy, material resources, or human creativity better than any of the alternatives? Yes: Ludwig von Mises, Paul Hawken, Joseph Schumpeter No: Peter Kropotkin, Rosa Luxemburg

Is capitalism sustainable? Can it persist as a means of organizing human affairs, under any conceivable set of reforms as per the above? Can it overcome both political challenges (such as socialist revolutionism) and material challenges (such as limited natural resources)? Yes: Buckminster Fuller, Paul Hawken No: Joseph Schumpeter, Karl Marx, Vladimir Lenin, Leon Trotsky

Often, when political polemicists use the word "capitalism," they actually have in mind a more specific and recent phenomenon, finance capitalism, i.e. the purchase and sale of corporate debt and equity, often on liquid secondary markets. This brings up a fifth question: does finance capitalism undermine industrial capitalism? There are those, from Thorstein Veblen to Mahathir bin Mohamed who have contended that finance undermines the productive economy, while others from Eugen von Böhm-Bawerk to George Soros have replied that financial profit-seeking prods and complements industrial capitalism.

Why does no one agree what capitalism is?

It's hard to answer this objectively. Apparently there has never been a clear agreement about the linguistic, economic, ethical and moral implications, that is, the "political economy" of capitalism itself.

Rather like a governing political party that everyone seeks to control, regardless of ideology, the definition of "capitalism" at any given time tends to reflect the current conflicts between interest groups.

The non-obvious combinations demonstrate the complexity of the debate. For instance, Joseph Schumpeter claimed in 1962 that capitalism was more efficient than any alternative, but doomed due to its complex and abstract rationale which the ordinary citizen would not ultimately defend.

Also, the overlapping claims confuse most debaters. Ayn Rand made an original defense of capitalism as a moral code, but her arguments for its efficiency were not original, and selected to support her moral claims. Karl Marx believed capitalism inefficient and unfair at the administration of an immoral purpose, and thus ultimately unsustainable. John McMurtry, a current commentator within the anti-globalization movement, believes it has become increasingly fair at the administration of this immoral purpose. Robin Hanson, another current commentator, asks if fitness and fairness and morality can ever really be separated by other than electoral political means?

In whose interest is capitalism?

Finally, the arguments appeal strongly to different interest groups, and often support their positions as "rights".

Currently recognized property owners, especially corporate shareholders and holders of deeds in land or rights to exploit natural capital, are generally recognized as advocating extremely strong property rights.

However, the definition of capital has broadened in recent years to recognize and include the rationales of other major interest groups: artists or other creators who rely on copyright law, legal patent and trademark holders who improve what they call intellectual capital, workers who are largely trading in their own less creative labor guided by a body of shared and imitative instructional capital - the trades themselves, all have reasons to prefer status quo property law over any given set of proposed reforms.

Even judges, mediators or administrators charged with fair execution of some ethical code and the maintenance of some relationship between human capital and financial capital within a capitalist representative democracy, tend to have strong self-interest reasons to argue for one view or another - typically, that view that assigns them a meaningful role in the capitalist economy.

Karl Marx made the strong claim that this role actually affects their cognition, and leads them inexorably to irreconcilable points of view, i.e. that no agreement about capitalism was possible by "class collaboration", and "class struggle" between these defined it. This view was advocated by many revolutionary movements of the 20th century, but was often abandoned in practice as it seemed to lead to "class war", endless violence between those with irreconcilable points of view.

Today, certain parties that were traditionally opposed to capitalism, e.g. the Communist Party of China, see some role for it in the development of their society. In such cases, debate focuses on incentive systems, not on the overall moral structure or ethical clarity of "capitalism". Former anti-capitalist groups holding such views are generally seen as having "switched sides", however, and they are often no longer on good terms with their old allies.

What is capitalism good for?

One important modern argument is that capitalism simply isn't a system, merely a set of questions, challenges, and assertions regarding human behavior. Like biology, or ecology and its relationship to animal behavior, it is made complex by human language, culture and ideas. Jane Jacobs and George Lakoff argued separately that there was a Guardian Ethic which was fundamentally related to nurturing and protection of life, and a Trader Ethic more related to the unique primate practice of trade. Jacobs thought that the two were made and kept separate in history, and that any collaboration between them was corruption, i.e. any unifying system that claimed to make assertions regarding both, would simply be serving itself.

Other doctrines focus narrowly on the application of capitalist means to natural capital (Paul Hawken) or individual capital (Ayn Rand) - assuming a more general moral and legal framework which discourages these same mechanisms when applied to non-living beings coercively, e.g. "creative accounting" combining individual creativity with the complex instructional base of accounting itself.

See also

External links

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