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Capitalism generally refers to

in philosophy and politics, a social system based on the principle of individual rights, including property rights.

in economics, a combination of economic practices that became institutionalized in Europe between the 16th and 19th centuries, especially involving the right of individuals and groups of individuals acting as "legal persons" (or corporations) to buy and sell capital goods such as land, labor, and money (see finance and credit), in a free market (see trade), and relying on the enforcement by the state of private property rights rather than feudal obligations.

additionally, it may mean competing 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 markets. (See economics, political economy, laissez-faire)

a belief in the advantages of such practices.

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.

The first use of the word "capitalism" in English is by Thackeray in 1854, by which he meant having ownership of capital. In 1867 Proudhon 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 "Kapitalisten", "capitalists" (meaning 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.

History of capitalism

Main article: History of capitalism

History of theory of capitalism

Main article: History of theory of capitalism

The conception of what constitutes capitalism has changed significantly over time, as well as varying depending on the political perspective and analytical approach taken. Adam Smith focussed on the role of enlightened self-interest (the "invisible hand") and the role of specialisation in making capital accumulation efficient. Some proponents of capitalism (like Milton Friedman) emphasize the role of free markets, which, they claim, promote liberty. 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 have 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.

How capitalism works

Example of Starting a Business

The following example introduces many of the ideas involved in capitalism. When starting a business, the initial owners or investors 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 ("capitalist" in this context refers to a person who has capital, rather than a person who favors capitalism), 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 need 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.

Capitalist ownership

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.

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 are generally agreed on by both advocates and critics of capitalism. These are a private sector, property rights, economic growth, economic mobility, unequal distribution of wealth, competition, evolving entrepreneurial networks and social arrangements, and the existence of free markets like the labor market.

Property rights

One core difference to earlier social systems was the introduction of strong formal property rights and rule of law. Earlier social systems were much weaker in these aspects, often meaning that the weak had to accept the leadership and pay for the protection from a strong patron or lord. It has been argued that a strong formal property and legal system caused a) more independence b) clear and provable protected ownership c) standardization and integration of property rules and property information for whole country d) increased trust due to more certain punishment of cheating in economic transactions e) more formal and complex written representations of ownership which easier allowed things like shared risk and ownership in companies or the insurance of risk f) more loans for new projects since more things could be used as collateral for the loans g) easier and more reliable information for things like credit history and the worth of assets h) increased fungability, standardization and transportability of property representations allowing things like national markets in companies or easy transportation of property in complex networks of people. All of these things enhanced economic growth.

Economic growth

One of the primary objectives in a social system in which commerce and property have a central role is to promote the growth 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. It has been argued that GDP/capita was essentially flat until the industrial revolution and introduction of the capitalistic system. And that it thereafter has increased rapidly in capitalistic countries . And that a higher GDP/capita allows a higher standard of living, including adequate or better food, housing, clothes, healthcare, psychotherapy, shorter working hours and no work for children and the elderly. Things which are not possible if the GDP/capita is low enough and people live on the edge of starvation.

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. Differences in actual income are smaller, for example in the US 1% of the population earning under 20% of all household income.

Arguments directed against unfairness or dysfunctionality of this 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 could mean that an untamed capitalist system has inherent biases favoring those who already possess greater resources. For example, rich people can give their children a better education and inherited wealth. This can create or even increase large differences in wealth between people who do not differ in ability or effort.

A different explanation for the wealth inequality is that some people voluntarily do not achieve their full economic potential. For example, some people may not see money as very important and make life choices that make them earn less than their potential. Another explanation is that human contributions vary much more than humans vary in height. As can be illustrated by comparing the contributions of an arsonist and an inventor/producer of antibiotics. Still another explanation 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 inequality. Although this may apply primarily to wealth inequality between nations, not to wealth inequality in a nation.

A 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. The claim is made that capitalist economics are not zero-sum games and that more wealth for most people is actually "created" through innovation, and risk-taking. And that inequality may be necessary in this process. For example, the inheritance of wealth may cause people to continue working and saving when they get older.

Robert Nozick has argued 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. But 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.

Thus, people who see uneven wealth distribution as a lesser or unavoidable problem tend to argue that if inequality leads to higher average wealth and higher wealth and income for most people, then wealth inequality may be acceptable. For example, there are far fewer poor in China today than under communism, even if there is more inequality. In response, critics of capitalism have argued that even if these arguments could justify some economic inequity, they cannot explain the very high 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 concentrate wealth in the hands of those that are the most productive in terms of providing goods and services that society values.
- The prospect of becoming wealthier than others serves as an incentive to produce (see motivation).
- A significant cause of poverty is the lack of capitalism.
- Capitalism hasn't been properly implemented yet.
- Wealth distribution concentrated in the hands of the minority of individuals is the natural outcome of capitalism since being more productive than others is a matter of being willing to exert oneself and most people are naturally content to "just get by" with minimal effort.
- 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 everyone - 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.

Competition, survival of the fittest and 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 and evolution 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 board members. Networks of customer links, and monetary flows exhibit similar structures.

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.

Some argue that it is impossible to make accurate long term predictions about things like the weather or the economy, using arguments from chaos theory. They see the unplanned development of capitalism as one of its greatest strengths, arguing that many solutions are tried and that real-world competition finds a good solution. This in contrast to central planning of society which often decides for an incorrect solution due to faulty forecasting.

Employment/unemployment

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 free resources, such as free access to land, 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.

Depressed or stagnant economies have been known to reach unemployment rates have reached levels of 30%, while events such as war mobilization (a good example is World War II) have resulted in 1-2% unemployment, often called "full employment". A typical rate of unemployment in Western economies would range from a low of 5% to a high of 10%. 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.

Some libertarian economists, such as Henry Hazlitt, argue that higher unemployment is chiefly a result of minimum wage laws, and is not a necessary part of a capitalist economy. Hazlitt argues in Economics in One Lesson that if the value of the work of potential employees is less than the minimum wage, it would be a loss to the employer to employ these people. Thus, if there is any person whose productive capacity as an employee (for any employers) is less than the minimum wage, then that person will necessarily be unemployed -- so unemployment will exist whenever the legal minimum wage exceeds the actual value of the least productive members of the labor pool. Likewise, if the amount of money a person can receive on welfare nears or meets the amount they could make by working, the person will have a reduced incentive to work.

Some unemployment is voluntary, as when not accepting a possible job because searching for a better one, or when voluntarily living on savings or in a non-wage-earning role such as a traditional homemaker. Many measures of unemployment do not include these types of unemployment -- they count only people who are actively seeking employment and have not been able to find offers.

Size of government, taxes, regulations and market failures

Many consider an economy with lower taxes, smaller government and fewer regulations to be more capitalistic. Anarcho-capitalists claim that capitalism require no government or taxes. Others doubt that property rights could exist in such a system and consider minarchism to be the most capitalistic economy.

The last century saw a very large increase in these variables in western countries. Combined U.S. government spending increased from 3-4% of GDP to 33%. An average for 16 industrial nations jumped from 8% of GDP to 45%. Thus it can be argued that the degree of capitalism has seen a remarkable decline in Western nations.

Related to this is the question of market failures. A market failure is a case in which a market fails to efficiently provide or allocate goods and services. Examples could be pollution, health care, unemployment or wealth inequality. Libertarians argue that there are no market failures. Socialists that the markets always fail. Between these extremes there are a wide spectrum of political ideologies with different views on market failures and how to prevent them.

One explanation for the apparent decline in capitalism is that the Western nations have increasingly regulated various market failures. Libertarians would instead argue that the regulations restrict competition, that the taxes go to the special interest groups with the most political clout and that the almost constantly expanding governments do things less efficiently than the private sector. One warning historical example being the constantly growing size of taxes and regulations in Rome before the fall of that civilization.

Other approaches

Capitalism in political ideologies

Main article: Capitalism and related political ideologies

Marxist critique 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 the unchanged after-tax income of the poorest quintile of the US population during the last two decades. While at the same time the average income and especially the income of the US rich have increased. . Supporters of capitalism point out that the percentage of people in developing countries living below $1 per day have halved in only twenty years, especially in countries like China that have embraced capitalism .

Marxists believe that 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.

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 in the economy. For example, some assert that the market in 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."

Another classification, associated largely with the Austrian school of economics, regards most present economic systems as a perversion of capitalism, sometimes called crony capitalism, and envisages a de-cronied capitalist ideal.

Some use the phrase "laissez-faire capitalism" to distinguish between "ordinary capitalism," believing that there is a difference. Some also use the phrase to differentiate their preferred economic system from present economic systems which they believe are wrongly labeled as capitalism by many. These also say that the phrase "laissez-faire capitalism" is redundant, pointing out that the common definition of capitalism explicitly refers to trade occuring in a "free market." These assert that "capitalism" is already a laissez-faire system by definition.

Proponents of the world-system perspective suggest that the whole globe has been incorporated into a single capitalist world-economy. Even though a state may be socialist, it works in relation to a much larger, overarching capitalist world-economy.

Indexes of Economic Freedom

There are two Indexes of Economic Freedom used in economic research, one published by the Heritage Foundation(a neoliberal thinktank) and the Wall Street Journal, another published by the Fraser Institute. Both attempt to measure of the degree of capitalism in countries. They use statistics from independent organizations like the United Nations to score countries in various categories like the size of government, degree of taxes, security of property rights, degree of free trade and size of market regulations. Many peer-reviewed papers have been published using this material on the relationship between capitalism and for example poverty . The more capitalistic countries have much higher average income per person, higher income of the poorest 10%, higher life-expectancy, higher literacy, lower infant mortality, higher access to water sources and less corrupton. The share of income in percent going to the poorest 10% is the same for both more and less capitalistic countries . Other studies have shown similar results .

Attempts to decide the importance of the subcomponents of the indexes have often yielded contradictory results. However, strong property rights may be particularly important. The economist Hernando de Soto has argued that weak property rights, especially for the poor, play a major role in poverty and underdevelopment in developing countries . Many developing countries are now trying to strengthen and simplify their property rights system after the successful application of his ideas in Peru .

External links

Books

Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass., and London: Belknap Press of Harvard University Press, 1977.
Landes, David S. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, U.K.: Cambridge University Press, 1969.
Rostow, W. W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press, 1960.
Rand, Ayn, Capitalism: The Unknown Ideal ISBN 0451147952
Smith, Adam, The Wealth of Nations (An Inquiry into the Nature and Causes of)

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