Capitalism

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Capitalism typically refers to an economic and social system in which the means of production (also known as capital) are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in new technologies and industries; and wages are paid to labor. However, the pervasiveness of wage labor and capital/property not intended for the owner's active personal use (i.e. investment) defines capitalism, since prior economic systems featured all the aforementioned elements to some degree.

Capitalism can be based on the premises of laissez faire, where private individuals and businesses fire and hire wage laborers, or exchange goods and services without intervention from the State-- hence the terms "unfettered capitalism" or “free market.”^[1] The extent to which different markets are "free", as well as the rules determining what may and may not be private property, is a matter of politics and policy and many states have what are termed "mixed economies."^[2] Mixed economies refer to capitalism being mixed with economic planning or statism, with some considering statism the ideological opposite of capitalism^[3] and others, such as anarcho-syndicalists, considering both, capitalism and statism ideologically similar and historically hard to discern.^[4] Scholars in the social sciences, including historians, economic sociologists, economists, anthropologists and philosophers have debated over how to define capitalism, however there is little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism.^[5]

Capitalism as a system developed incrementally from the 16th century in Europe, although capitalist organization existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages.^[6][7][8] Capitalism became dominant in the Western world following the demise of feudalism.^[8] Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.^[9]

There is no consensus on capitalism nor how it should be used as an analytical category.^[10] There are a variety of historical cases over which it is applied, varying in time, geography, politics and culture.^[9] Economists, political economists and historians have taken different perspectives on the analysis of capitalism.

Economists usually put emphasis on the market mechanism, degree of government control over markets (laissez faire), and property rights^[11][12], while most political economists emphasize private property, power relations, wage labor, and class.^[2] While there is a general agreement that capitalism encourages economic growth,^[13] political advocacy both for and against capitalism is based on many different arguments.

Etymology and early usage

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Capital evolved from Capitale, a late Latin word based on proto-Indo-European kaput, meaning "head"—also the origin of chattel and cattle in the sense of movable property (only much later to refer only to livestock). Capitale emerged in the 12th to 13th centuries in the sense of funds, stock of merchandise, sum of money, or money carrying interest.^[6][21][22] By 1283 it was used in the sense of the capital assets of a trading firm. It was frequently interchanged with a number of other words—wealth, money, funds, goods, principal, assets, property, patrimony.^[6]

The term capitalist refers to an owner of capital rather than an economic system, but shows earlier recorded use than the term capitalism, dating back to the mid-seventeenth century. The Hollandische Mercurius uses it in 1633 and 1654 to refer to owners of capital.^[6] Arthur Young was one of first to use capitalist in his work Travels in France (1792).^[22][23] David Ricardo, in his Principles of Political Economy and Taxation (1817), referred to "the capitalist" many times.^[24] Samuel Taylor Coleridge, an English poet, used capitalist in his work Table Talk (1823).^[25] Pierre-Joseph Proudhon used the term capitalist in his first work, What is Property? (1840) to refer to the owners of capital. Benjamin Disraeli used the term capitalist in his 1845 work Sybil.^[22] Karl Marx and Friedrich Engels used the term capitalist (Kapitalist) in The Communist Manifesto (1848) to refer to a private owner of capital.

The term capitalism appeared in 1753 in the EncyclopĂŠdia, with the narrow meaning of "The state of one who is rich".^[6] However, according to the Oxford English Dictionary (OED), the term capitalism was first used by novelist William Makepeace Thackeray in 1854, by which he meant having ownership of capital.^[22] Also according to the OED, Carl Adolph Douai, a German-American socialist and abolitionist, used the term private capitalism in 1863.

The initial usage of the term capitalism in its modern sense has been attributed to Louis Blanc in 1850 and Pierre-Joseph Proudhon in 1861.^[26] Marx and Engels referred to the capitalistic system (kapitalistisches System)^[27][28] and to the capitalist mode of production (kapitalistische Produktionsform) in Das Kapital (1867).^[29] The use of the word "capitalism" in reference to an economic system appears twice in Volume I of Das Kapital, p. 124 (German edition), and in Theories of Surplus Value, tome II, p. 493 (German edition). Marx did not extensively use the term.

Marx's notion of the capitalist mode of production is characterised as a system of primarily private ownership of the means of production in a mainly market economy, with a legal framework on commerce and a physical infrastructure provided by the state.^[30] Engels made more frequent use of the term capitalism; volumes II and III of Das Kapital, both edited by Engels after Marx's death, contain the word "capitalism" four and three times, respectively. The three combined volumes of Das Kapital (1867, 1885, 1894) contain the word capitalist more than 2,600 times.

An 1877 work entitled Better Times by Hugh Gabutt and an 1884 article in the Pall Mall Gazette also used the term capitalism.^[22] A later use of the term capitalism to describe the production system was by the German economist Werner Sombart, in his 1902 book The Jews and Modern Capitalism (Die Juden und das Wirtschaftsleben). Sombart's close friend and colleague, Max Weber, also used capitalism in his 1904 book The Protestant Ethic and the Spirit of Capitalism (Die protestantische Ethik und der Geist des Kapitalismus).

History

Greco-Roman capitalism

The origins of modern capitalism and markets can be traced back to the Roman Empire ^[31], which re-emerged later in its Muslim form when early Syrian Muslims, known as Umayyad, triumphed.^[32]

Islamic capitalism

The origins of capitalism and free markets can be traced back to the Islamic Golden Age and Muslim Agricultural Revolution,^[33] where the first market economy and earliest forms of merchant capitalism took root between the 8th–12th centuries, which some refer to as "Islamic capitalism".^[34] A vigorous monetary economy was created by Muslims on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organisation were introduced by economists, merchants and traders during this time. Such innovations included the earliest trading companies, big businesses, contracts, bills of exchange, long-distance international trade, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal),^[7] circulating capital, capital expenditure, revenue, cheques, promissory notes,^[35] trusts (see Waqf), startup companies,^[36] savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system,^[37] and lawsuits.^[38] Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced.^[39][40] Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.^[7]

The systems of contract relied upon by merchants was very effective. Merchants would buy and sell on commission, with money loaned to them by wealthy investors, or a joint investment of several merchants, who were often Muslim, Christian and Jewish. Recently, a collection of documents was found in an Egyptian synagogue shedding a very detailed and human light on the life of medieval Middle Eastern merchants. Business partnerships would be made for many commercial ventures, and bonds of kinship enabled trade networks to form over huge distances. Networks developed during this time enabled a world in which money could be promised by a bank in Baghdad and cashed in Spain, creating the cheque system of today.^{[citation needed]} Each time items passed through the cities along this extraordinary network, the city imposed a tax, resulting in high prices once reaching the final destination. These innovations made by Muslims and Jews laid the foundations for the modern economic system.

Mercantilism

A painting of a French seaport from 1638 at the height of mercantilism.

The period between the 16th and 18th centuries is commonly described as mercantilism. ^[41] This period was associated with geographic discoveries by merchant overseas traders, especially from England and the Low Countries; the European colonization of the Americas; and the rapid growth in overseas trade. Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods.^[9] While some scholars see mercantilism as the earliest stage of modern capitalism, others argue that modern capitalism did not emerge until later. For example, Karl Polanyi, noted that "mercantilism, with all its tendency toward commercialization, never attacked the safeguards which protected [the] two basic elements of production - labor and land - from becoming the elements of commerce"; thus mercantilist attitudes towards economic regulation were closer to feudalist attitudes, "they disagreed only on the methods of regulation." Moreover Polanyi argued that the hallmark of capitalism is the establishment of generalized markets for what he referred to as the "fictitious commodities": land, labor, and money. Accordingly, "not until 1834 was a competitive labor market established in England, hence industrial capitalism as a social system cannot be said to have existed before that date."^[42]

The earliest forms of mercantilism date back to the Roman Empire. When the Roman Empire expanded, the mercantilist economy expanded throughout Europe. After the collapse of the Roman Empire, most of the European economy became controlled by local feudal powers, and mercantilism collapsed there. However, mercantilism persisted in Arabia. Due to its proximity to neighboring countries, the Arabs established trade routes to Egypt, Persia, and Byzantium. As Islam spread in the 7th century, mercantilism spread rapidly to Spain, Portugal, Northern Africa, and Asia. Mercantilism finally revived in Europe in the 14th century, as mercantilism spread from Spain and Portugal.^[43]

Among the major tenets of mercantilist theory was bullionism, a doctrine stressing the importance of accumulating precious metals. Mercantilists argued that a state should export more goods than it imported so that foreigners would have to pay the difference in precious metals. Mercantilists asserted that only raw materials that could not be extracted at home should be imported; and promoted government subsides, such as the granting of monopolies and protective tariffs, were necessary to encourage home production of manufactured goods. European merchants, backed by state controls, subsidies, and monopolies, made most of their profits from the buying and selling of goods. In the words of Francis Bacon, the purpose of mercantilism was "the opening and well-balancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices…"^[44] Similar practices of economic regimentation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of the absolutism, the state superseded the local guilds as the regulator of the economy. During that time the guilds essentially functioned like cartels that monopolized the quantity of craftsmen to earn above-market wages.^[45]

At the period from the 18th century, the commercial stage of capitalism originated from the start of the British East India Company and the Dutch East India Company.^[7][46] These companies were characterized by their colonial and expansionary powers given to them by nation-states.^[7] During this era, merchants, who had traded under the previous stage of mercantilism, invested capital in the East India Companies and other colonies, seeking a return on investment. In his "History of Economic Analysis", Austrian economist Joseph Schumpeter reduced mercantilist propositions to three main concerns: exchange controls, export monopolism and balance of trade. ^[47]

Industrialism

The Bank of England is one of the oldest central banks. It was founded in 1694 and nationalised in 1946.

A new group of economic theorists, led by David Hume^[48] and Adam Smith, in the mid 18th century, challenged fundamental mercantilist doctrines as the belief that the amount of the world’s wealth remained constant and that a state could only increase its wealth at the expense of another state.

During the Industrial Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, the surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture. Industrial capitalism marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routinization of work tasks; and finally established the global domination of the capitalist mode of production.^[41]

Britain also abandoned its protectionist policy, as embraced by mercantilism. In the 19th century,

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