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Capitalism
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Capitalism
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Economic systems
Capitalism is an economic system in which capital assets are privately owned and items are brought to market for profit. In a capitalist economy, the parties to a transaction determine the prices at which assets, goods, and services are exchanged.[1][2][3] Central elements of capitalism include capital accumulation, competitive markets and wage labor.[4] Capitalism has existed under many forms of government, in many different times, places, and cultures.[] Following the demise of feudalism, capitalism became the dominant economic system in the Western world. Capitalism successfully overcame a challenge by communism and is now the dominant system worldwide.[][5] Economists, political economists, and historians have taken different perspectives in their analysis of capitalism and recognized various forms of it in practice. These include laissez-faire capitalism, welfare capitalism and state capitalism, all characterizing varying levels of state power and public capital control. A pejorative characterization, crony capitalism, refers to a state of affairs in which insider corruption, nepotism and cartels dominate the system. This is considered to be the normal state of mature capitalism in Marxian economics but as an aberrant state by advocates of capitalism. All such characterizations are subjective and tend to mark out a point of view either more or less sympathetic to attempts by voters to regulate business. Laissez-faire economists emphasize the degree to which government does not have control over markets and the importance of property rights.[6][7] Others emphasize the need for government regulation, to prevent monopolies and to soften the effects of the boom and bust cycle.[8] Most political economists emphasize private property as well, in addition to power relations, wage labor, class, and the uniqueness of capitalism as a historical formation.[9] The extent to which different markets are free, as well as the rules defining private property, is a matter of politics and
Capitalism policy. Many states have what are termed mixed economies, referring to the varying degree of planned and market-driven elements in an economic system.[9] Proponents of capitalism use historical precedent to claim that it is the greatest wealth-producing system known to man, and that its benefits are mainly to the ordinary person.[10] Critics of capitalism associate it with economic instability[11] and an inability to provide for the well-being of all people.[12] The term capitalism, in its modern sense, is often attributed to Karl Marx.[][13] However, Marx was far more concerned with characterizing the sociological effects of capital economics. The "ism" was used only twice in the more political interpretations of Marx's work, which were primarily authored by Friedrich Engels. In the 20th century defenders of the capitalist system often replaced the term capitalism with phrases such as free enterprise and private enterprise and replaced capitalist with rentier and investor in reaction to the negative connotations sometimes associated with capitalism.[] The author Ayn Rand attempted a positive moral defense of capitalism as such but in highly romantic or literary terms that did not stand logical or historical scrutiny.[14] By contrast modern welfare economics has produced a number of detailed defenses of the mixed capitalist economy based on public ownership of infrastructure and defense of positive human rights such as housing or education. Amartya Sen in particular, in Development as Freedom[15] , his Nobel Prize winning work, outlined the reasoning by which many human societies have reached the common conclusion that mixed democratic capitalist economies with welfare systems were optimal to support human life. In practice, all early 21st century developed economies devote 4060% of their GDP to taxes and the public sector. Those that devote more, such as Scandinavian countries, are also rated the most successful by their citizens, and by measures of economic well-being such as literacy, housing, lifespan, and gender equality. This suggests that capitalism is or has evolved towards some kind of compromise or truce with democracy, as Joseph Schumpeter first clearly predicted.[16]
Economic elements
There are a number of different elements in the capitalist socio-economic system. Capitalism is defined as a social and economic system in which capital assets are mainly owned and controlled by private persons, labor is purchased for money wages, capital gains accrue to private owners, and the price mechanism is utilized to allocate capital goods between uses. The extent to which the price mechanism is used, the degree of competitiveness, and government intervention in markets distinguish exact forms of capitalism.[17] There are different variations of capitalism which have different relationships to markets and the state. In free-market and laissez-faire forms of capitalism, markets are utilized most extensively with minimal or no regulation over the pricing mechanism. In interventionist and mixed economies, markets continue to play a dominant role but are regulated to some extent by government in order to correct market failures, promote social welfare, conserve natural resources, and fund defense and public safety. In state capitalist systems, markets are relied upon the least, with the state relying heavily on state-owned enterprises or indirect economic planning to accumulate capital. Capitalism and capitalist economics is generally considered to be the opposite of socialism, which contrasts with all forms of capitalism in the following ways: social ownership of the means of production, where returns on the means of production accrue to society at large, and goods and services are produced directly for their utility (as opposed to being produced by profit-seeking businesses).
Capitalism
Capitalism
Macroeconomics
Macroeconomics keeps its eyes on things such as inflation: the rate at which money loses its value over time; growth: how much money a government has and how quickly it accrues money; unemployment, and rates of trade between other countries. Whereas microeconomics deals with individual firms, people, and other institutions that work within a set frame work of rules to balance prices and the workings of a singular government. Both micro and macroeconomics work together to form a single set of evolving rules and regulations. Governments (the macroeconomic side) set both national and international regulations that keep track of prices and corporations' (microeconomics) growth rates, set prices, and trade, while the corporations influence what federal laws are set.[20][21][22]
Types of capitalism
There are many variants of capitalism in existence that differ according to country and region. They vary in their institutional makeup and by their economic policies. The common features among all the different forms of capitalism is that they are based on the production of goods and services for profit, predominately market-based allocation of resources, and they are structured upon the accumulation of capital. The major forms of capitalism are listed below:
Mercantilism
Mercantilism is a nationalist form of early capitalism that came into existence approximately in the late 16th century. It is characterized by the intertwining of national business interests to state-interest and imperialism, and consequently, the state apparatus is utilized to advance national business interests abroad. An example of this is colonists living in America who were only allowed to trade with and purchase goods from their respective mother countries (Britain, France, etc.). Mercantilism holds that the wealth of a nation is increased through a positive balance of trade with other nations, and corresponds to the phase of capitalist development called the Primitive accumulation of capital.
Free-market capitalism
Free-market capitalism refers to an economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free-market capitalism where the role of the state is limited to protecting property rights.
Social-market economy
A social-market economy is a nominally free-market system where government intervention in price formation is kept to a minimum but the state provides significant services in the area of social security, unemployment benefits and recognition of labor rights through national collective bargaining arrangements. This model is prominent in Western and Northern European countries, albeit in slightly different configurations. The vast majority of enterprises are privately owned in this economic model. Rhine capitalism refers to the contemporary model of capitalism and adaptation of the social market model that exists in continental Western Europe today.
Capitalism
State capitalism
State capitalism consists of state ownership of the means of production within a state, and the organization of state enterprises as commercial, profit-seeking businesses. The debate between proponents of private versus state capitalism is centered around questions of managerial efficacy, productive efficiency, and fair distribution of wealth. According to Aldo Musacchio, a professor at Harvard Business School, it is a system in which governments, whether democratic or autocratic, exercise a widespread influence on the economy, through either direct ownership or various subsidies. Musacchio also emphasizes the difference between today's state capitalism and its predecessors. Gone are the days when governments appointed bureaucrats to run companies. The world's largest state-owned enterprises are traded on the public markets and kept in good health by large institutional investors.[23]
Corporate capitalism
Corporate capitalism is a free or mixed-market economy characterized by the dominance of hierarchical, bureaucratic corporations. State-monopoly capitalism was originally a Marxist concept referring to a form of corporate capitalism in which state policy is utilized to benefit and promote the interests of dominant or established corporations by shielding them from competitive pressures or by providing them with subsidies.[citation needed]
Mixed economy
A mixed economy is a largely market-based economy consisting of both private and public ownership of the means of production and economic interventionism through macroeconomic policies intended to correct market failures, reduce unemployment and keep inflation low. The degree of intervention in markets varies among different countries. Some mixed economies, such as France under dirigisme, also featured a degree of indirect economic planning over a largely capitalist-based economy. Most capitalist economies are defined as "mixed economies" to some degree.[citation needed]
Other
Other variants of capitalism include:
Anarcho-capitalism Crony capitalism Finance capitalism Financial capitalism Late capitalism Neo-capitalism Post-capitalism Technocapitalism Welfare capitalism
The term capitalist as referring to an owner of capital (rather than its meaning of someone adherent to the economic system) shows earlier recorded use than the term capitalism, dating back to the mid-17th century. Capitalist is derived from capital, which evolved from capitale, a late Latin word based on proto-Indo-European caput, meaning
Capitalism "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 referring to funds, stock of merchandise, sum of money, or money carrying interest.[32][33][34] 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, assets, property, and so on.[32] The Hollandische Mercurius uses capitalists in 1633 and 1654 to refer to owners of capital.[32] In French, tienne Clavier referred to capitalistes in 1788,[35] six years before its first recorded English usage by Arthur Young in his work Travels in France (1792).[34][36] David Ricardo, in his Principles of Political Economy and Taxation (1817), referred to "the capitalist" many times.[37] Samuel Taylor Coleridge, an English poet, used capitalist in his work Table Talk (1823).[38] 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.[34] Karl Marx and Friedrich Engels used the term capitalist (Kapitalist) in The Communist Manifesto (1848) to refer to a private owner of capital. According to the Oxford English Dictionary (OED), the term capitalism was first used by novelist William Makepeace Thackeray in 1854 in The Newcomes, where he meant "having ownership of capital".[34] 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.[39] Karl Marx and Friedrich Engels referred to the capitalistic system (kapitalistisches System)[40][41] and to the capitalist mode of production (kapitalistische Produktionsform) in Das Kapital (1867).[42] 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 form capitalism, but instead those of capitalist and capitalist mode of production, which appear more than 2600 times in the trilogy Das Kapital. 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. He believed that no legal framework was available to protect the laborers, and so exploitation by the companies was rife.[43]Wikipedia:Citing sources 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.[34] 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).
Capitalism
History
Economic trade for profit has existed since at least the second millennium BC.[44] However, capitalism in its modern form is usually traced to the Mercantilism of the 16th18th Centuries.
Mercantilism
The period between the sixteenth and eighteenth centuries is commonly described as mercantilism.[] This period, the Age of Discovery, was associated with geographic exploration being exploited 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.[] While some scholars see mercantilism as the earliest stage of A painting of a French seaport from 1638 at the height of mercantilism. capitalism, others argue that 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 productionlabor and landfrom 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."[45] Evidence of long-distance merchant-driven trade motivated by profit has been found as early as the second millennium BCE, with the Old Assyrian merchants.[44] The earliest forms of mercantilism date back to the Roman Empire and Ancient China. 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, the silk road trade lines continued, and mercantilism cycled following dynasty rise and collapse in East Asia. 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 Portugal and Spain.[46] 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 argued that only raw materials that could not be extracted at home should be imported; and promoted government subsidies, such as the granting of monopolies and protective tariffs, which mercantilists thought were necessary to encourage home production of manufactured goods.
Capitalism
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..."[47] Similar practices of economic regimentation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of 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.[48]
Robert Clive after the Battle of Plassey. The battle began East India Company rule in India.
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.[][] These companies were characterized by their colonial and expansionary powers given to them by nation-states.[] 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," Joseph Schumpeter reduced mercantilist propositions to three main concerns: exchange controls, export monopolism and balance of trade.[49]
Industrialism
A new group of economic theorists, led by David Hume[51] 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 affected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, the surplus generated by the rise A Watt steam engine. The steam engine fuelled of commercial agriculture encouraged increased mechanization of primarily by coal propelled the Industrial [50] Revolution in Great Britain. 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 routine of work tasks; and finally established the global domination of the capitalist mode of production.[] Britain also abandoned its protectionist policy, as embraced by mercantilism. In the 19th century, Richard Cobden and John Bright, who based their beliefs on the Manchester School, initiated a movement to lower tariffs.[] In the 1840s, Britain adopted a less protectionist policy, with the repeal of the Corn Laws and the Navigation Acts.[] Britain reduced tariffs and quotas, in line with Adam Smith and David Ricardo's advocacy for free trade. Karl Polanyi argued that capitalism did not emerge until the progressive commodification of land, money, and labor culminating in the establishment of a generalized labor market in Britain in the 1830s. For Polanyi, "the extension of the market to the elements of industry land, labor and money was the inevitable consequence of the introduction of the factory system in a commercial society."[52] Other sources argued that mercantilism fell after the repeal of the Navigation Acts in 1849.[][53][]
Capitalism
Communism
After the Russian Revolution of 1917, but prior to the collapse of the Union of Soviet Socialist Republics and the COMECON trade bloc in the 1990s, and before China's shift to a more open state capitalism in the 1980s through 1990s, it was common to contrast communism with capitalism. This is far less common in the 21st century. Accordingly the understanding of the term has shifted markedly, as the alternatives to capitalism are no longer generally understood as authoritarian or totalitarian. A great deal of 20th century literature on the topic would be almost incomprehensible to modern readers, even knowing this context and history. For instance, the defense of capitalism against communism (or of Christianity or democracy against communism, far more common prior to the 1980s), and the suggestion that the conflict between the two systems might lead to global thermonuclear war, would be very difficult to explain to someone who had not lived through some part of the Cold War, or seen Tiananmen Square attacked, or experienced the Velvet Revolution of Eastern Europe in the 90s.[citation needed] Like capitalism, communism has also been characterized in many different ways, and has seen real (and extreme) variations in terms of respect of human rights, rule of law, and equal opportunity for gender and race. In early works (18581917) many of the references to communism are to elements it has in common with modern democracies, such as mixed economies, universal health care, literacy, housing, collective bargaining rights for labour, and limits to inherited class privilege. The perceived communist threat, and the conflation by some writers of communism and socialism, played a role in the evolution and establishment of modern economies, though how much is hotly debated.
In particular, monetarism, a theoretical alternative to Keynesianism that is more compatible with laissez-faire, gained increasing prominence in the capitalist world, especially under the leadership of Ronald Reagan in the US and Margaret Thatcher in the UK in the 1980s. Public and political interest began shifting away from the so-called collectivist concerns of Keynes's managed capitalism to a focus on individual choice, called "remarketized capitalism." [55] In the eyes of many economic and political commentators, the collapse of the Soviet Union brought further evidence of the superiority of market capitalism over planned economy.
Globalization
Although international trade has been associated with the development of capitalism for over five hundred years, some thinkers argue that a number of trends associated with globalization have acted to increase the mobility of people and capital since the last quarter of the 20th century, combining to circumscribe the room to maneuver of states in choosing non-capitalist models of development. Today, these trends have bolstered the argument that capitalism should now be viewed as a truly world system.[] However, other thinkers argue that globalization, even in its quantitative degree, is no greater now than during earlier periods of capitalist trade.[56]
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Perspectives
Classical political economy
The classical school of economic thought emerged in Britain in the late 18th century. The classical political economists Adam Smith, David Ricardo, Jean-Baptiste Say, and John Stuart Mill published analyses of the production, distribution and exchange of goods in a market that have since formed the basis of study for most contemporary economists. In France, 'Physiocrats' like Franois Quesnay promoted free trade based on a conception that wealth originated from land. Quesnay's Tableau conomique (1759), described the economy analytically and laid the foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed tariffs and customs duties and advocated free trade. Richard Cantillon defined long-run equilibrium as the balance of flows of income, and argued that the supply and demand mechanism around land influenced short-term prices.
Adam Smith
Smith's attack on mercantilism and his reasoning for "the system of natural liberty" in The Wealth of Nations (1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today. His theories regarding the "invisible hand" are commonly interpreted to mean individual pursuit of self-interest unintentionally producing collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period.[57] He criticized monopolies, tariffs, duties, and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo, second most important of the classical political economists and one of the most influential economists of modern times.[58] In The Principles of Political Economy and Taxation (1817), he developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade. Ricardo was a supporter of Say's Law and held the view that full employment is the normal equilibrium for a competitive economy.[59] He also argued that inflation is closely related to changes in quantity of money and credit and was a proponent of the law of diminishing returns, which states that each additional unit of input yields less and less additional output.[] The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods.[60] Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.[61] While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public goods.[] For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll). In addition, he advocated retaliatory tariffs to bring about free trade, and copyrights and patents to encourage innovation.[]
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Institutional economics
Institutional economics, once the main school of economic thought in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. It emphasizes the legal foundations of capitalism (see John R. Commons) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed. One key figure in institutional economics was Thorstein Veblen who in his book, The Theory of the Leisure Class (1899), analyzed the motivations of wealthy people in capitalism who conspicuously consumed their riches as a way of demonstrating success. The concept of conspicuous consumption was in direct contradiction to the neoclassical view that capitalism was efficient. In The Theory of Business Enterprise (1904) Veblen distinguished the motivations of industrial production for people to use things from Thorstein Veblen business motivations that used, or misused, industrial infrastructure for profit, arguing that the former often is hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power.
Capitalism The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of market economy against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, argued Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within Supply-side economics built on the work of the Austrian School, and particularly emphasize Say's Law: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers.
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Milton Friedman
Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as John Maynard Keynes had argued. Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.[] Neoclassical economists, who by 1998 constituted a majority of academic economists,[84] subscribe to a subjective theory of value, according to which the value derived from consumption of a good, rather than being objective and static, varies widely from person to person and for the same person at different times. Adherence to a subjective theory of value compels Neoclassical thinkers to reject the labor theory of value , upheld by Adam Smith and other classical liberal thinkers, which was grounded upon a conception of objective value. Neoclassical models typically adopt the assumptions of Marginalism, according to which economic value results from marginal utility and marginal cost (the marginal concepts). Marginalist theory implies that capitalists earn profits not by exploiting workers, but by forgoing current consumption, taking risks, and organizing production.
Capitalism services that consumers desire and are able to buy. To be profitable, firms must sell a quantity of their product at a certain price to yield a profit. A business may lose money if sales fall too low or if its costs become too high. The profit motive encourages firms to operate more efficiently. By using less materials, labor or capital, a firm can cut its production costs, which can lead to increased profits. An economy grows when the total value of goods and services produced rises. This growth requires investment in infrastructure, capital and other resources necessary in production. In a capitalist system, businesses decide when and how much they want to invest. Income in a capitalist economy depends primarily on what skills are in demand and what skills are being supplied. Skills that are in scarce supply are worth more in the market and can attract higher incomes. Competition among workers for jobs and among employers for skilled workers help determine wage rates. Firms need to pay high enough wages to attract the appropriate workers; when jobs are scarce, workers may accept lower wages than they would when jobs are plentiful. Trade union and governments influence wages in capitalist systems. Unions act to represent their members in negotiations with employers over such things as wage rates and acceptable working conditions.
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The market
Supply is the amount of a good or service produced by a firm and which is available for sale. Demand is the amount that people are willing to buy at a specific price. Prices tend to rise when demand exceeds supply, and fall when supply exceeds demand. In theory, the market is able to coordinate itself when a new equilibrium price and quantity is reached. Competition arises when more than one producer is trying to sell the same or similar products to the same buyers. In capitalist theory, competition leads to innovation and more affordable prices. Without competition, a monopoly or cartel may develop. A monopoly occurs when a firm supplies the total output in the market; the firm can therefore limit output and raise prices because it has no fear of competition. A cartel is a group of firms that act together in a monopolistic manner to control output and raise prices.
Role of government
The price (P) of a product is determined by a balance between production at each price (supply, S) and the desires of those with purchasing power at each price (demand, D). This results in a market equilibrium, with a given quantity (Q) sold of the product. A rise in demand would result in an increase in price and an increase in output.
In a capitalist system, the government does not prohibit private property or prevent individuals from working where they please. The government does not prevent firms from determining what wages they will pay and what prices they will charge for their products. Many countries, however, have minimum wage laws and minimum safety standards. Under some versions of capitalism, the government carries out a number of economic functions, such as issuing money, supervising public utilities and enforcing private contracts. Many countries have competition laws that prohibit monopolies and cartels from forming. Despite anti-monopoly laws, large corporations can form near-monopolies in some industries. Such firms can temporarily drop prices and accept losses to prevent competition from entering the market, and then raise them again once the threat of entry is reduced. In many countries, public utilities (e.g. electricity, heating fuel, communications) are able to operate as a monopoly under government
Capitalism regulation, due to high economies of scale. Government agencies regulate the standards of service in many industries, such as airlines and broadcasting, as well as financing a wide range of programs. In addition, the government regulates the flow of capital and uses financial tools such as the interest rate to control factors such as inflation and unemployment.[85]
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Institutions
New institutional economics, a field pioneered by Douglass North, stresses the need of a legal framework in order for capitalism to function optimally, and focuses on the relationship between the historical development of capitalism and the creation and maintenance of political and economic institutions.[89] In new institutional economics and other fields focusing on public policy, economists seek to judge when and whether governmental intervention (such as taxes, welfare, and government regulation) can result in potential gains in efficiency. According to Gregory Mankiw, a New Keynesian economist, governmental intervention can improve on market outcomes under conditions of "market failure", or situations in which the market on its own does not allocate resources efficiently.[90] Market failure occurs when an externality is present and a market will either under-produce a product with a positive externalization or overproduce a product that generates a negative externalization. Air pollution, for instance, is a negative externalization that cannot be incorporated into markets as the world's air is not owned and then sold for use to polluters. So, too much pollution could be emitted and people not involved in the production pay the cost of the pollution instead of the firm that initially emitted the air pollution. Critics of market failure theory, like Ronald Coase, Harold Demsetz, and James M. Buchanan argue that government programs and policies also fall short of absolute perfection. Market failures are often small, and government failures are sometimes large. It is therefore the case that imperfect markets are often better than imperfect governmental alternatives. While all nations currently have some kind of market regulations, the desirable degree of regulation is disputed.
Democracy
The relationship between democracy and capitalism is a contentious area in theory and popular political movements. The extension of universal adult male suffrage in 19th century Britain occurred along with the development of industrial capitalism, and democracy became widespread at the same time as capitalism, leading many theorists to posit a causal relationship between them, or that each affects the other. However, in the 20th century, according to some authors, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist regimes, absolute monarchies, and single-party states.[] While some thinkers argue that capitalist development more-or-less inevitably eventually leads to the emergence of democracy, others dispute this claim. Research on the democratic peace theory indicates that capitalist democracies rarely make war with one another[91] and have little internal violence. However, critics of the democratic peace
Capitalism theory note that democratic capitalist states may fight infrequently and or never with other democratic capitalist states because of political similarity or stability rather than because they are democratic or capitalist. Some commentators argue that though economic growth under capitalism has led to democratization in the past, it may not do so in the future, as authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.[92][93] States that have highly capitalistic economic systems have thrived under authoritarian or oppressive political systems. Singapore, which maintains a highly open market economy and attracts lots of foreign investment, does not protect civil liberties such as freedom of speech and expression. The private (capitalist) sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. Augusto Pinochet's rule in Chile led to economic growth by using authoritarian means to create a safe environment for investment and capitalism. In response to criticism of the system, some proponents of capitalism have argued that its advantages are supported by empirical research. Indices of Economic Freedom show a correlation between nations with more economic freedom (as defined by the indices) and higher scores on variables such as income and life expectancy, including the poor, in these nations.
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World's GDP per capita shows exponential growth since the beginning of the Industrial [94] Revolution.
Proponents argue that increasing GDP (per capita) is empirically shown to bring about improved standards of living, such as better Capitalism and the economy of the People's Republic of China availability of food, housing, clothing, and health care.[98] The decrease in the number of hours worked per week and the decreased participation of children and the elderly in the workforce have been attributed to capitalism.[99][100] Proponents also believe that a capitalist economy offers far more opportunities for individuals to raise their income through new professions or business ventures than do other economic forms. To their thinking, this potential is much greater than in either traditional feudal or tribal societies or in socialist societies.
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Political freedom
In his book The Road to Serfdom, Freidrich Hayek reasons that the economic freedom of capitalism is a requisite of political freedom. The argument he puts forward is that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion. Milton Friedman further repeated the statement which has been continuously echoed by others such as Andrew Brennan and Ronald Reagan. Friedman stated that centralized operations of economic activity is always accompanied by political repression. In his view, transactions in a market economy are voluntary, and the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminish power to coerce. Friedman's view was also shared by John Maynard Keynes, who believed that capitalism is vital for freedom to survive and thrive.[101][102]
Self-organization
Austrian School economists have argued that capitalism can organize itself into a complex system without an external guidance or central planning mechanism. Friedrich Hayek considered the phenomenon of self-organization as underpinning capitalism. Prices serve as a signal as to the urgent and unfilled wants of people, and the opportunity to earn profits if successful, or absorb losses if resources are used poorly or left idle, gives entrepreneurs incentive to use their knowledge and resources to satisfy those wants. Thus the activities of millions of people, each seeking his own interest, are coordinated.[]
Criticisms
Critics of capitalism associate it with social inequality and unfair distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism, counter-revolutionary wars and various forms of economic and cultural exploitation; materialism; repression of workers and trade unionists; social alienation; economic inequality; unemployment; and economic instability. Individual property rights have also been associated with the tragedy of the anticommons. Notable critics of capitalism have included: socialists, anarchists, communists, national socialists, social democrats, technocrats, some types of conservatives, Luddites, Narodniks, Shakers, and some types of nationalists. Marxists have advocated a revolutionary overthrow of capitalism that would lead to socialism, before eventually transforming into An Industrial Workers of the World poster (1911) communism. Many socialists consider capitalism to be irrational, in that production and the direction of the economy are unplanned, creating many inconsistencies and internal contradictions.[103] Labor historians and scholars such as Immanuel Wallerstein have argued that unfree labor by slaves, indentured servants, prisoners, and other coerced persons is compatible with capitalist relations.[104] Many aspects of capitalism have come under attack from the anti-globalization movement, which is primarily opposed to corporate capitalism. Environmentalists have argued that capitalism requires continual economic growth, and that it will inevitably deplete the finite natural resources of the Earth.[105] Many religions have criticized or opposed specific elements of capitalism. Traditional Judaism, Christianity, and Islam forbid lending money at interest,[106][107] although alternative methods of banking have been developed. Some Christians have criticized capitalism for its materialist aspects[108] and its inability to account for the wellbeing of all people. Many of Jesus's parables deal with clearly economic concerns: farming, shepherding, being in debt, doing hard labor, being excluded from banquets and the houses of the rich, and have implications for wealth and power
Capitalism distribution.[109][110]
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Notes
[1] Chris Jenks. Core Sociological Dichotomies. "Capitalism, as a mode of production, is an economic system of manufacture and exchange which is geared toward the production and sale of commodities within a market for profit, where the manufacture of commodities consists of the use of the formally free labour of workers in exchange for a wage to create commodities in which the manufacturer extracts surplus value from the labour of the workers in terms of the difference between the wages paid to the worker and the value of the commodity produced by him/her to generate that profit." London, England, UK; Thousand Oaks, California, USA; New Delhi, India: SAGE. p. 383. [2] "Capitalism" (http:/ / oxforddictionaries. com/ definition/ english/ capitalism) Oxford Dictionaries. "capitalism. an economic and political system in which a countrys trade and industry are controlled by private owners for profit, rather than by the state." Retrieved 4 January 2013. [3] http:/ / www. merriam-webster. com/ dictionary/ capitalism "an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market" [4] Heilbroner, Robert L. "capitalism." (http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_C000053) The New Palgrave Dictionary of Economics. Second Edition. Steven N. Durlauf and Lawrence E. Blume (Eds.). Palgrave Macmillan, 2008. [5] James Fulcher, Capitalism, A Very Short Introduction, "In one respect there can, however, be little doubt that capitalism has gone global and that is in the elimination of alternative systems." p. 99, Oxford University Press, 2004, ISBN 978-0-19-280218-7. [9] Stilwell, Frank. "Political Economy: the Contest of Economic Ideas." First Edition. Oxford University Press. Melbourne, Australia. 2002. [10] Friedman, Milton. Capitalism and Freedom. [Chicago]: University of Chicago, 1962. Print. [11] Krugman, Paul, Wells, Robin, Economics, Worth Publishers, New York, (2006) [12] Caritas in veritate paragraph 36 (http:/ / www. vatican. va/ holy_father/ benedict_xvi/ encyclicals/ documents/ hf_ben-xvi_enc_20090629_caritas-in-veritate_en. html) [14] Bass, Robert H. (Spring 2006). "Egoism versus Right". The Journal of Ayn Rand Studies 7 (2): 329349. [15] Amartya Sen, Development as Freedom. Oxford: Oxford University Press. 1999. [16] Yuichi Shionoya, Schumpeter and the Idea of Social Science: A Metatheoretical Study. Cambridge: Cambridge University Press. 2007. [17] Macmillan Dictionary of Modern Economics, 3rd Ed., 1986, p. 54. [18] Ragan, Christopher T.S., and Richard G. Lipsey. Microeconomics. Twelfth Canadian Edition ed. Toronto: Pearson Education Canada, 2008. Print. [19] Robbins, Richard H. Global problems and the culture of capitalism. Boston: Allyn & Bacon, 2007. Print. [25] "free enterprise." Roget's 21st Century Thesaurus, Third Edition. Philip Lief Group 2008. [26] Mutualist.org (http:/ / www. mutualist. org/ ). "...based on voluntary cooperation, free exchange, or mutual aid." [27] Barrons Dictionary of Finance and Investment Terms. 1995. p. 74 [28] "Market economy" (http:/ / unabridged. merriam-webster. com/ cgi-bin/ unabridged?va=market economy), Merriam-Webster Unabridged Dictionary
Although the term "liberalism" retains its original meaning in most of the world, it has unfortunately come to have a very different meaning in late twentieth-century America. Hence terms such as "market liberalism," "classical liberalism," or "libertarianism" are often used in its place in America.
[32] Braudel p. 232 [34] James Augustus Henry Murray. "Capital". A New English Dictionary on Historical Principles (http:/ / www. archive. org/ details/ oedvol02). Oxford English Press. Vol 2. p. 93. [35] e.g., "L'Angleterre a-t-elle l'heureux privilge de n'avoir ni Agioteurs, ni Banquiers, ni Faiseurs de services, ni Capitalistes?" in [Etienne Clavier] (1788) De la foi publique envers les cranciers de l'tat: lettres M. Linguet sur le n CXVI de ses annales p. 19 (http:/ / books. google. com/ books?id=ESMVAAAAQAAJ& pg=PA19) [36] Arthur Young. Travels in France (http:/ / books. google. com/ books?id=l10JAAAAQAAJ& printsec=titlepage#PPA529,M1) [37] Ricardo, David. Principles of Political Economy and Taxation. 1821. John Murray Publisher, 3rd edition. [38] Samuel Taylor Coleridge. Tabel The Complete Works of Samuel Taylor Coleridge (http:/ / books. google. com/ books?id=ma-4W-XiGkIC& printsec=titlepage). p. 267. [39] Braudel, Fernand. The Wheels of Commerce: Civilization and Capitalism 15th18th Century, Harper and Row, 1979, p. 237 [40] Karl Marx. Chapter 16: "Absolute and Relative Surplus-Value". Das Kapital.
' The prolongation of the working-day beyond the point at which the laborer would have produced just an equivalent for the value of his labor-power, and the appropriation of that surplus-labor by capital, this is production of absolute surplus-value. It forms the general groundwork of the capitalist system, and the starting-point for the production of relative surplus-value.
[41] Karl Marx. Chapter Twenty-Five: "The General Law of Capitalist Accumulation". Das Kapital.
Capitalism
' ' ' [42] Saunders, Peter (1995). Capitalism. University of Minnesota Press. p. 1 [43] Karl Marx. Das Kapital. [44] Warburton, David, Macroeconomics from the beginning: The General Theory, Ancient Markets, and the Rate of Interest. Paris: Recherches et Publications, 2003.p49 [45] Polanyi, Karl. The Great Transformation. Beacon Press, Boston. 1944. p. 87 [46] Layton, Julia. (11 March 2008) "The Rise of Capitalism" (http:/ / history. howstuffworks. com/ european-history/ capitalism3. htm). History.howstuffworks.com. Retrieved on 2013-02-24. [47] Quoted in Sir George Clark, The Seventeenth Century (New York: Oxford University Press, 1961), p. 24. [48] Mancur Olson, The rise and decline of nations: economic growth, stagflation, and social rigidities (New Haven & London 1982). [49] Schumpeter, J.A. (1954) History of Economic Analysis [50] Watt steam engine image: located in the lobby of into the Superior Technical School of Industrial Engineers of the UPM (Madrid) [52] Polanyi, Karl. The Great Transformation, Beacon Press. Boston. 1944. p. 78 [55] Fulcher, James. Capitalism. 1st ed. New York: Oxford University Press, 2004. [57] Degen, Robert. The Triumph of Capitalism. 1st ed. New Brunswick, NJ: Transaction Publishers, 2008. [60] Eric Aaron, What's Right? (Dural, Australia: Rosenberg Publishing, 2003), 75. [62] The Communist Manifesto [63] "To Marx, the problem of reconstituting society did not arise from some prescription, motivated by his personal predilections; it followed, as an iron-clad historical necessity on the one hand, from the productive forces grown to powerful maturity; on the other, from the impossibility further to organize these forces according to the will of the law of value." Leon Trotsky, "Marxism in our Time", 1939 (Inevitability of Socialism), WSWS.org (http:/ / wsws. org/ articles/ 2008/ nov2008/ time-n01. shtml) [65] Karl Marx. Chapter Twenty-Five: The General Law of Capitalist Accumulation. Das Kapital. [66] Dobb, Maurice 1947 Studies in the Development of Capitalism. New York: International Publishers Co., Inc. [67] David Harvey 1989 The Condition of Postmodernity [68] Wheen, Francis Books That Shook the World: Marx's Das Kapital1st ed. London: Atlantic Books, 2006 [70] See, for example, the works of Stephen Resnick and Richard Wolff. [72] Lawson, Victoria. Making Development Geography (Human Geography in the Making). New York: A Hodder Arnold Publication, 2007. Print. [73] Harvey, David. Notes towards a theory of uneven geographical development. Print. [74] Bendix, Reinhard: Max Weber: An Intellectual Portrait. Love & Brydone; London, 1959 [76] Bendix, Reinhard: Max Weber: An Intellectual Portrait. Love & Brydone; London, 1959 [77] Max Weber; Peter R. Baehr; Gordon C. Wells (2002). The Protestant ethic and the "spirit" of capitalism and other writings. Penguin. [79] David Simpson, (1983) "Joseph Schumpeter and the Austrian School of Economics", Journal of Economic Studies, Vol. 10 Iss: 4, pp. 1828 [81] Erhardt III, Erwin. "History of Economic Development." University of Cincinnati. Lindner Center Auditorium, Cincinnati. 7 November 2008. [82] Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times Magazine 13 September 1970. [85] "Capitalism." World Book Encyclopedia. 1988. p. 194. [91] For the influence of capitalism on peace, see Mousseau, M. (2009) "The Social Market Roots of Democratic Peace", International Security 33 (4) [97] Martin Wolf, Why Globalization works, p.4345 [103] Brander, James A. Government policy toward business. 4th ed. Mississauga, Ontario: John Wiley & Sons Canada, Ltd., 2006. Print. [104] That unfree labor is acceptable to capital was argued during the 1980s by Tom Brass. See Towards a Comparative Political Economy of Unfree Labor (Cass, 1999). [106] Baba Metzia 61b [107] Moehlman, 1934, p.67. [110] Thomas Gubleton, archbishop of Detroit speaking in "Capitalism: A love story"
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References
Bacher, Christian (2007). Capitalism, Ethics and the Paradoxon of Self-Exploitation (http://books.google.co. uk/books?id=w_6PqBp64y0C&lpg=PP1&pg=PA2). Munich: GRIN Verlag. p.2. ISBN978-3-638-63658-2. De George, Richard T. (1986). Business Ethics. New York: Macmillan. p.104. ISBN978-0-02-328010-8. Lash, Scott; Urry, John (2000). "Capitalism". In Abercrombie, Nicholas; Hill, Stephen; Turner, Bryan S. The Penguin Dictionary of Sociology (4th ed.). London: Penguin Books. pp.3640. ISBN978-0-14-051380-6. Fulcher, James (2004). Capitalism A Very Short Introduction. Oxford: Oxford University Press. ISBN978-0-19-280218-7. McCraw, Thomas K. (August 2011). "The Current Crisis and the Essence of Capitalism" (http://www. themontrealreview.com/2009/The-current-crisis-and-the-essence-of-capitalism.php). The Montreal Review. ISSN 0707-9656 (http://www.worldcat.org/issn/0707-9656). Obrinsky, Mark (1983). Profit Theory and Capitalism (http://www.questia.com/read/4995070/ profit-theory-and-capitalism). Philadelphia: University of Pennsylvania Press viaQuestia (subscription required) . p.1. ISBN978-0-8122-7863-7. Wolf, Eric R. (1982). Europe and the People Without History. Berkeley: University of California Press. ISBN978-0-520-04459-3. Wood, Ellen Meiksins (2002). The Origin of Capitalism: A Longer View (http://books.google.co.uk/ books?id=FZPyKjVguVoC). London: Verso. ISBN978-1-85984-392-5.
External links
Capitalism (http://www.bbc.co.uk/programmes/p00545kv) on In Our Time at the BBC. ( listen now (http:// www.bbc.co.uk/iplayer/console/p00545kv/In_Our_Time_Capitalism)) Hessen, Robert (2008). Capitalism (http://www.econlib.org/library/Enc/Capitalism.html). The Concise Encyclopedia of Economics (2nd ed.). Library of Economics and Liberty. ISBN978-0865976658. OCLC 237794267 (http://www.worldcat.org/oclc/237794267). Center on Capitalism and Society (http://capitalism.columbia.edu/) at Columbia University Center for the Study of Capitalism (http://capitalism.wfu.edu/) at Wake Forest University Commonwealth Club of California-Dr. Yaron Brook and Dr. David Callahan: Is Capitalism Moral? A Debate October 22, 2012 (http://www.commonwealthclub.org/events/archive/podcast/ dr-yaron-brook-and-dr-david-callahan-capitalism-moral-debate-102212) (http://www.textbooksfree.org/Economics_3_Basic_Characteristics_of_Capitalism.htm) Basic Characteristics of Capitalism from textbooksfree.org
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License
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