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Capitalism generally refers to
* a combination of economic practices that became institutionalized in
Europe between the 16th and 19th centuries, especially involving the
formation and trade in ownership of corporations (see corporate
personhood and companies) for buying and selling goods, especially
capital goods (including land and labor), in a relatively free
(meaning, free from state control) market
* competing (and contentious) theories that developed in the 19th
century, in the context of the industrial revolution, and 20th century,
in the context of the Cold War, meant to justify the private ownership
of capital, to explain the operation of such markets, and to guide the
application or elimination of government regulation of property and
* and beliefs about the advantages of such practices.
Capitalism as an economic system
There is much debate over how to define capitalism. Some proponents of
capitalism (like Milton Friedman) tend to emphasise the role of efficient
free markets, which, they claim, promote individual freedom and democracy.
For many (like 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 Marx), it is defined by the creation of a labor market. As Marx
observed (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.
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 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
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 (Labour). If more money
is needed than the initial owners are willing 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 then has a
degree of legal authority, and thereby hopefully 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 in the company, or they can sell all of the
equipment, land, and other assets, and split the proceeds between them.
All real, 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.
Under 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
* 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 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. 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.
This provides a financial incentive for owners to exercise their authority
in a way that increases the profitability of what they own rather than to
use it for other purposes.
Characteristics of Capitalist Economies
Economic Growth: capitalist economies have shown an erratic but sustained
tendency towards economic growth defined as an increase in GDP. They have on
occasion been through near disastrous periods (such as the Great
depression), and some have argued that it has only been government
intervention that has prevented capitalist economies from collapsing. Some
of these argue that it is only government intervention that has enabled
capitalist economies to ever grow at all, or that economic growth in
capitalist economies is not due to capitalism itself, but exists despite
capitalism - perhaps due to some other reason such as increased scientific
knowledge, some form of imperialism, or whatever. Others have argued that
the natural tendency of capitalism is to continuous growth and that
government intervention is the cause of depressions. Yet others argue that
growth, or often growth insufficiently guided by democracy, is a bad thing.
Still others argue that modern capitalism has been a disaster because of its
other effects besides the growth of GDP. Further discussion on these points
might be found in following sections. Nevertheless, good or bad, because of
or despite capitalism, it can be seen from history that there has been a
sustained tendency for capitalist economies to grow over time.
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, and can if they
desire sell it and spend the resulting money on whatever they choose.
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. Most characteristics of people, such as height or weight, and
it might be surmised people's productivity, are distributed according to a
bell shaped curve with a peak at the average and few people far on either
side - for example there are no people 100,000 times as tall as average, in
fact there are none even 2 times as tall as average. 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.
It is not agreed as to why capitalist economies do not distribute wealth in
a bell-shaped fashion or why they tend to collect it in such an unequal
fashion. Some argue that collection of wealth in relatively few hands serves
a function that in the end benefits all, while others say that it is not
beneficial to anyone - not even the wealthy. Yet others argue that the cause
is not enough capitalism, or that capitalism hasn't been properly
implemented yet - perhaps ordinary people do not have practical access to
all of the legal and financial optimisation and tax minimisation techniques
of the wealthy because the tools to do so have not yet been commoditized
sufficiently, or perhaps government interference in markets protects the
wealthy. Others argue that capitalist economies allocate wealth to the rich
because they deserve it, or because society requires that they have it as an
incentive, or for any number of reasons. One person believes that the
financial markets and banks where most wealth is stored act as a means of
redistribution of wealth. Still others believe that the present wealth
distribution is the only possible outcome of capitalism, while critics often
claim that the uneven distribution shows capitalism to be faulty, or
immoral. Further discussion on these points might be found in following
sections. 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.  has examples of
networks of company directors. 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
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.
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%. Occasionally they 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.
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").
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 or not. 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 systems,
capitalist systems have functioned well under unelected governments, two
examples being Hong Kong and Singapore.
In 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
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.
Logically, this argument is sound, given the huge impoverished industrial
working class then often 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 Imperialism: The Highest Stage
of Capitalism, which has become a basis for the modern neo-Marxist analysis
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" as a phenomenon (the system of the private ownership of capital
goods) is certainly different from "capitalism" as an ideology (the
philosophical advocacy of that system). Moreover, 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 a
classical liberal means by calling himself a capitalist, and vice versa.
Opponents of capitalism sometimes deny that these represent subtantially
different things, or say they go hand-in-hand. This criticism is often
founded upon the Marxist idea that ideology is largely a consequence of
underlying economic realities -- or the simplification thereof which holds
that people favor ideologies which justify their behavior or privilege.
Although it is arguable whether these meanings the word "capitalism" of the
same kind are somehow "equivalent" under someone's subjective notion of
equivalence, for the sake of not making a straw man argument when accusing
someone else to be a proponent of capitalism, these different concepts must
be clearly distinguished.
Capitalism and political ideologies
Some political ideologies favor capitalism:
* Libertarianism, sometimes also called classical liberalism, defends a
capitalist free market with minimal state intervention. 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.
* Conservatism varies depending on countries in its specific stances. In
Western nations, conservatives often defend the status quo of
capitalist practices. Most people who call themselves politically
conservative however, economically subscribe to Mercantilism. See also
* Mercantilism defends a mostly free market within the nation, but
proposes state intervention to protect domestic commerce and industries
against foreign competition. See also protectionism, and in opposition,
free trade, and Crony capitalism.
Some ideologies favor a mixed economy with capitalist and state-run elements:
* Social democracy and new liberalism 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. See also welfare state,
* Distributism desires a economy with private property and with almost
all people possessing a means of production. This would take place in
for example a country of sustenance farmers. In a distributist economy,
laws would be made to restrict larger corperations from taking over.
Distributists favor achieving these goals not primarily through
government regulation, but firstly through grass roots efforts and
* Fascism established a state-controlled economy with powers delegated to
capitalist interests subservient to the central government. Socialists
sometimes describe modern capitalism as "fascist", meaning an analogy
to historical fascism with its cooperation (or cronyism) between
industry and government.
Some ideologies oppose capitalism and support a collectively run economy:
* Socialism argues for greater state control of the economy than under
social democracy. Areas of capitalism or private ownership may remain
in certain sectors (such as small businesses) under socialism, but
industry and labor are regulated by the state for the benefit of the
populace at large.
* Communism is a variant of socialism which calls for the overthrow 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 socialism, is distinct from the
* Libertarian socialism or left anarchism argues for collective control
of the economy without the need for a State.
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 four 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 actually encourage traits we find useful or
appealing in human beings? Yes: Ludwig von Mises, Ayn Rand, Robin Hanson No:
John McMurty, Karl Marx
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? Yes: Buckminster Fuller, John McMurty, Friedrich
Hayek No: Karl Marx, Peter Kropotkin
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
Is capitalism sustainable? Can it persist as a means of organizing human
affairs, under any conceivable set of reforms as per the above? Yes:
Buckminster Fuller, Paul Hawken No: Joseph Schumpeter, Karl Marx
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 efficient but unfair at the administration of an
immoral purpose, and thus ultimately unsustainable. John McMurty, 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, even those parties traditionally opposed to capitalism, e.g. the
Communist Party of China of Mao Zedong, see some role for it in the
development of their society. Debate focuses on incentive systems, not on
the overall moral structure or ethical clarity of "capitalism".
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. Similar to biology or ecology and its relationship to animal
behavior, 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.
Aside from the very narrow arguments advancing specific mechanisms, it is
quite difficult or pointless to distinguish critiques of capitalism from
critiques of Western European civilization, colonialism or imperialism.
These arguments often recur interchangeably within the context of the
extremely complex anti-globalization movement, which is often (but not
universally) described as "anti-capitalist".