Capitalism refers to an economic system in which all or most of the means of production are privately owned and operated for profit, and where investments, production, distribution, income, and prices are determined by market forces (a “Free Market”), rather than by centralized state control (as in a command economy).
Capitalism contrasts with socialism and communism, where the means of production and the resulting products are owned and used by the state or by the community collectively. Capitalism is also contrasted with feudalism, where land may be privately operated, but is owned by the sate and held in fee.
Capitalist economic practices became institutionalized in England between the 16th and 19th centuries, although some features of capitalist organization existed in the ancient world, and early forms of merchant capitalism flourished during the middle Ages. Capitalism has been dominant in the Western world since the end of feudalism. From Britain it gradually spread throughout Europe, across political and cultural frontiers. In the 19th and 20th centuries, capitalism provided the main, but not exclusive, means of industrialization throughout much of the world.
Some proponents of capitalism are: Adam Smith, Milton Friedman, Ayn Rand, Alan Greenspan, Immanuel Wallerstein, etc. Adam Smith is generally regarded as the intellectual father of capitalism with his book, “Wealth of Nations”.
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’s advocacy of economic liberalism focused on the role of enlightened self-interest (the invisible hand) and the role of specialization in making capital accumulation efficient.
Some proponents of capitalism (like Milton Friedman, Ayn Rand and Alan Greenspan) emphasize the role of free markets, which they claim promote cooperation between individuals, innovation, economic growth, as well as liberty.
For many (like Immanuel Wallerstein), capitalism hinges on the elaboration of an economic system in which goods and service are traded in the market, and capitals goods belong to non-state entities, onto a global scale.
For other (like Karl Marx), it is defined by historically unprecedented social relations resulting from the creation of a labor market in which most people have to sale their labor power in order to survive. As Marx argued, capitalism is also distinguished from other market economic with private ownership by the concentration of the means of production in the hands of individuals.
The economists of the Austrian School expound that an economy that is not planned or guided by governmental authority will be superior in efficiency and organization due to the phenomenon of self-organization. Many others use capitalism as a synonym for a market economy.
Characteristic of Capitalist Economies
A set of broad characteristics are generally agreed on by both advocates and critics of capitalism. These are:
v Private property rights
An essential characteristic of capitalism is the institution of rule of law in establishing and protecting private property, including, most notably, private ownership of the means of production. It has been argued that a strong formal property and legal system made possible:
· Greater independence
· Clear and provable protected ownership
· The standardization and integration of property rule and property information in the country as a whole
· Increase trust arising from a greater certainty of punishment for cheating in economic transactions
· More formal and complex written statements of ownership that permitted the easier assumption of shared risk and ownership in companies, and the insurance of risk
· Greater availability of loans for new projects, since more things could be used as collateral for the loans
· Easier and more reliable information regarding such things as credit history and the worth of assets
· An increased fungibility, standardization and transferability of statements documenting the ownership of property, which paved the way for structures such as national markets for companies and the easy transportation of property through complex network of individuals and other entities.
All of these things enhanced economic growth.
v Free market
The notion of a “Free market”, where all economic decisions regarding transfer of money goods’ and service take place on a voluntary basis, free of coercive influence, is commonly considered to be an essential and exclusive characteristic of capitalism. In an ideal free market system none of these economic decisions are decreed by government. Instead, they are determined in decentralized manner by individuals trading, bargaining, cooperating, and competing with each other.
In a free market, government may act in a defensive mode to forbid coercion among market participants but does not engage in proactive interventionist coercion.
A legal system that grants and protects property rights provides property owners the liberty to sell heir property in accordance to their own valuation of that property. If there are no willing buyers at their offered price, they have the freedom to retain it.
According to standard capitalist theory, as explained by Adam Smith in Wealth of Nations, when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity.
A free market consists of voluntary trade without interventionist regulation. Prices, for example, are determined by trade rather than by government.
The pursuit and realization of profit is an essential characteristic of capitalism. Profit is derived by selling a product for more than the cost required to produce or acquire it. Some consider the pursuit of profit to be the essence of the capitalism. Sociologist and economist, Max Weber, says that “capitalism is identical with the pursuit of profit, and forever renewed profit, by means of conscious, rational, capitalistic enterprise.”
v Free enterprise
In capitalist economies, a predominant proportion of productive capacity has belonged to companies, in the sense of for-profit organizations. This includes many forms of organizations tat existed in earlier economic systems, such as sole proprietorship and partnership. Non-profit organizations existing in capitalism includes cooperatives, credit unions, and communes.
More unique to capitalism is the form of organization called corporation, which can be both for-profit and non-profit. This entity can act as a virtual person in many matters before the law. This gives some unique advantages to the owners, such as limited liability of the owners and perpetual lifetime beyond that of current owners.
v 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 standard measures of 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 free market setting production, price and resources allocation. It has been argued that GDP per capita was essentially flat until the industrial revolution and the emergence of the capitalist economy, and that is has since increased rapidly in capitalist countries.
It ha also been argued that a higher GDP per capita promotes a higher standard of living, including the adequate or improved availability of food, housing, clothing, health care, reduced working hours and freedom from work for children and the elderly. These are reduced or unavailable if the GDP per capita is too low, so that most people are living a marginal existence.
Economic growth is however not universally viewed as an unequivocal good. The downside of such growth is referred to by economists as the “externalization of costs”, among other things, these effect include pollution, the disruption of traditional living pattern and cultures, the spread of pathogen, wars over resources or market access, and the creation of under classes.
v Economic mobility
One of the key markers of entrepreneurial and “growth” in a society is its economic mobility, defined as the existence of large changes in the make-up of its socio-economic strata. This is manifested as the occurrence of large fluctuations in the various deciles and quintiles of income and wealth among the population, and the existence of large changes over a person’s lifetime in relation to their real 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 establishing a business venture.
However, the existence of large fluctuations in income deciles does not always represent income mobility-with individuals receiving regular wage increases over their working lives and then retiring, such fluctuations alone do not show that is ‘mobility’ per se. Moreover, it is argued by many labor economists that wage instability represent the transfer of risk to workers and particular sectors of the economy such as agriculture, and away from the holders of capital.
v Unequal distribution of wealth and income
It is reasonable to expect that some disparity in wealth and income among individuals would exist in a capitalist system as this is determined through market forces rather than by centralized governmental authority.
Some view a significant disparity and concentration of wealth to be problem and that such is endemic to capitalism, while others do not have such egalitarian concerns. Some opponents of capitalism assert that there should be no inequality in wealth and earnings among individuals commensurate to their skills, abilities or efforts.
Defenders of capitalism respond that since free market capitalism distributes wealth and earnings among individuals commensurate to their skills, abilities, and efforts, it provides inherent incentives for human beings to hone their skills, improve their abilities, and make strong efforts to meet the needs of each other, incentives that are missing or significantly less present in any other type of economic/political system.
While a great deal of planning is undertaken among individual companies and other organizations in capitalist economies, few significant mechanisms for imposing overall direction are available to government. There is also a scarcity of reliable predictive tools and foreknowledge of how an economy is likely to behave or perform more than a year or two into the future.
While most transactions may be planned and agreed by the actors involved, many society-wide phenomena that emerge from the markets and its transactions are often not planned, predicted, approved or authorized by anyone.
Nevertheless, such an economic system can organize itself into a complex system without an external guidance or planning mechanism. This phenomenon is called “self-organization”. Friedrich Hayek corned the term “catallaxy” as a market where “spontaneous order” emerges when no centralized control source (government) overrides decisions of individuals pursuing their own ends.
Which Economies are “Capitalist”?
The Austrian school of economies, regard most present economic systems as a perversion of capitalism, sometimes called crony capitalism, and envisages a de-cronied capitalist ideal. Similarly, some use the phrase “laissez-faire capitalism” to distinguish between “ordinary capitalism”, believing there is a different. Others find the phrase “laissez-faire capitalism” redundant, pointing out that the common definition of capitalism explicitly refers to trade occurring in a “free market”.
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 government 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 threat 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.
Mainstream economists, for their part, admit that the present economic systems have diverged from earlier forms labeled “capitalism”, but many believe that some of the modern economies are still best described as being “capitalism”.