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Introduction | History of Capitalism | Criticisms of Capitalism
Introduction Back to Top

Capitalism is the economic and social system (and also the mode of production) in which the means of production are predominantly privately owned and operated for profit, and distribution and exchange is in a mainly market economy. It is usually considered to involve the right of individuals and corporations to trade (using money) in goods, services, labor and land.

Some form of Capitalism has been dominant in the Western world since the end of feudalism in the Middle Ages, and has provided the main, although not exclusive, means of industrialization throughout much of the world. Its rise to prominence sprang out of the mercantilism of the 16th to the 18th Centuries, and followed the rise of Liberalism and laissez-faire economics in western society. The capitalist mode of production, however, may exist within societies with differing state systems (e.g. liberal democracy, fascism) and different social structures.

In Marxist terms, the owners of capital are the dominant capitalist class (or bourgeoisie), and the working class (or proletariat) who do not own capital must live by selling their labor power in exchange for a wage. Thus, according to Karl Marx, Capitalism is based on the exploitation of workers by the owners of capital, and under his theory of historical materialism, represents just one of the stages in the evolution of a society which would be overthrown as the workers gain class consciousness and take control over the state.

History of Capitalism Back to Top

Although some features of Capitalist organization existed in the ancient world (e.g. the early Roman Empire, the medieval Caliphate in the Middle East), Capitalist economic practices became institutionalized in England between the 16th and 19th Centuries, and then spread throughout Europe and across political and cultural frontiers.

With the emergence of modern nation-states in the 16th to the 18th Centuries, mercantilism (the economic theory that the prosperity of a nation depends upon its capital, or economic assets, as represented by gold and silver, and that the volume of the world economy and international trade is unchangeable, encouraging a protectionist role for government) became dominant in Europe. The classical tradition in Capitalist economic thought emerged in Britain in the late 18th Century, with Adam Smith, David Ricardo (1772 - 1823) and John Stuart Mill, as well as with Jean-Baptiste Say (1767 - 1832) in France. Important contributions to the theory of property are found in the earlier work of John Locke, who had argued that the right to private property is a natural right.

Adam Smith's criticism of the mercantile system in his "The Wealth of Nations" of 1776 is often considered the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with Capitalism today, particularly his theory of the "invisible hand" of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. He criticized monopolies, tariffs, duties, and other state-enforced restrictions of his time, and he believed that the market is the most fair and efficient arbitrator of resources.

David Ricardo, one of the most influential economists of modern times, developed the law of comparative advantage (which explains how trade can benefit all parties involved as long as they produce goods with different relative costs) in his "The Principles of Political Economy and Taxation" of 1817, which supports the economic case for free trade, a cornerstone of capitalist thinking. He also argued that inflation is closely related to changes in quantity of money and credit, expanded on Say's Law of full employment in a competitive economy, and described the law of diminishing returns (which states that each additional unit of input yields less and less additional output), all essential building blocks in the theory of Capitalism.

In the wake of industrialization, the repeal of restrictive laws, and the teachings of Smith and Ricardo, laissez-faire Capitalism gained favor over mercantilism in Britain in the mid-19th Century, and it embraced Liberalism, competition and the development of a market economy, from where it rapidly spread throughout much of the western world.

In the late 19th Century, the control and direction of large areas of industry came into the hands of financiers, and the processes of production became subordinated to the accumulation of money profits in a financial system (sometimes known as "finance capitalism"). Late 19th and early 20th Century Capitalism was marked by the concentration of capital into large monopolistic or oligopolistic holdings by banks and financiers, and by the growth of large corporations.

During the late 19th and early 20th Century, Capitalism set itself in opposition to the rising tide of Socialist, Marxist and Communist thought, and to the whole concept of centrally-planned economies. But, by the end of the 19th Century, economic depressions and "boom and bust" business cycles had become a recurring problem. In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world.

In response, the state began to play an increasingly prominent role in the capitalistic system throughout much of the world, exemplified by the New Deal of American President Franklin D. Roosevelt (1882 - 1945). Mixed economies (containing both privately-owned and state-owned enterprises, and with a mix of market economy and planned economy characteristics) and the interventionist Keynesian economics of British economist John Maynard Keynes (1883 - 1946) became the norm.

After the long post-war boom, during which the Keynesian "state capitalism" was in the ascendant, a new push towards laissez-faire Capitalism and classical Liberalism was led by the economists Friedrich Hayek (1899 - 1992) and Milton Friedman (1912 - 2006), and championed by conservative leaders like Ronald Reagan (1911 - 2004) and Margaret Thatcher (1925 - 2013) in the 1970's.

Criticisms of Capitalism Back to Top

Capitalism has met with strong opposition throughout its history, both from the left and the right:

  • The free market and property rights:
    The Anarchist Pierre-Joseph Proudhon (1809 - 1865) and the Marxist Friedrich Engels (1820 - 1895) have argued that the free market is not necessarily free, but weighted towards those who already own property, forcing those without property to sell their labor to capitalists and landlords in a market favorable to the latter, and to accept low wages in order to survive.
  • Market failures:
    The allocation of goods and services by a free market is not as efficient as it might be (due to the lack of perfect information and perfect competition), and individuals' pursuit of self-interest can lead to bad results for society as a whole. It is argued that this and certain other unique problems with a free market (including monopolies, monopsonies, insider trading and price gouging) are grounds for government intervention.
  • Market instability:
    Marxists claim that market instability is a permanent feature of capitalist economy, and that the unplanned and explosive growth of Capitalism does not occur in a smooth manner, but is interrupted by periods of overproduction in which stagnation or decline occur (i.e. recessions and depressions).
  • Profit and exploitation:
    Critics of Capitalism view the system as inherently exploitative because the owners of capital only pay labor for the cost of survival (food, shelter, clothing, etc), while expropriating the excess (i.e. surplus value). Since capitalists control the means of production (e.g. factories, businesses, machinery) and workers control only their labor, the worker is naturally coerced into allowing their labor to be exploited, and is not paid according to the true worth of his labor but arbitrarily according to what the employer is willing to pay.
  • Inefficiency and waste:
    Some opponents criticize the shift from pre-industrial reuse and thriftiness before Capitalism to a consumer-based economy that pushes "ready-made" materials and planned obsolescence, thus creating a potentially insoluble ecological problem. Advertising and marketing are also seen as a wasteful use of resources, and brand-based marketing puts more emphasis on a company's name-brand than on the quality of its products.
  • Unequal distribution of wealth and income:
    Some view a significant disparity and concentration of wealth to be a problem endemic to Capitalism, and argue that this inequality is excessive, unfair, dysfunctional or even immoral, and may lead to social problems (such as higher crime rates) that affect both poor and rich. It is further argued that the capitalist system may also have inherent biases favoring those who already possess greater resources. The wealthy may not put their wealth to productive use, while at the same time the system undermines an economy's mass buying power by denying resources to poorer people, who have a tendency to spend rather than save.
  • Employment and unemployment:
    Some economists consider that a certain level of unemployment is necessary for the proper functioning of capitalist economies, and that this "natural rate of unemployment" highlights the inefficiency of a capitalist economy, since not all its resources (e.g. human labor) are being allocated efficiently.
  • Imperialism and human rights violations:
    Some argue that Capitalism thrives on an uneven and exploitative relationship between wealthy nations who force regime or system changes in poor countries which are only beneficial to them, often through exploitative wars. Dependency Theory holds that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former. Marxists, particularly Vladimir Ilyich Lenin (1870 - 1924), argue that Capitalism needs imperialism in order to survive, as it expands its over-saturated local markets into (and drains the resources out of) other less-developed nations.
  • Democracy:
    Some critics have argued that the Capitalist system can be undemocratic (although Capitalism as an economic system is not necessarily tied to democracy). Oft-cited examples include people not being able to criticize their boss out of risk of getting fired, and not being able to express their opinions due to lack of funds to afford access to the media.
  • Economic freedom:
    There has been criticism of the usual measures of economic freedom which are often used to justify Capitalism. If economic freedom is to include the freedom to have meaningful decision-making control over productive resources, then it is argued that the various points mentioned above actually result in reduced, not increased, economic freedom.
  • Sustainability and the environment:
    Some question the continued sustainability of an economic system that insists on continued strong economic growth, requires increasingly greater amounts of natural resources and energy, and promotes environmentally irresponsible consumption and production, arguing that many aspects of the environment have been severely degraded since the industrial revolution. The globalization of production, which is an integral part of the functioning of modern Capitalism, also produces significant pollution and waste of resources.
  • Religious criticism:
    Some religions criticize or outright reject capitalism (e.g. Islam strongly forbids usury, the lending of money at an interest). Some Christians have also strongly criticized Capitalism, particularly its materialistic aspects (the early Socialists drew many of their principles from Christian values opposed to the "bourgeois values" of profiteering, greed, selfishness and hoarding). Some see unfettered Capitalism as a threat to cultural and religious traditions.

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