Capitalism | Definition, Characteristics, History, Merits and Criticisms

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Capitalism, also called open economy or free market economy or free enterprise economy, or the economic system dominant in the Western world since the break of feudalism, in which most of the means of production are privately owned or in the hands of capitalists and Production is directed and income is distributed through the operation of mass markets. One of the main objectives of capitalism is to make maximum profit.

Capitalism | Definition, Characteristics, History, Merits, and Criticisms
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Understanding Capitalism

To comprehend the concept of capitalism, it is important to delve into the meaning of this economic system and its defining characteristics. Capitalism represents the pinnacle of economic development following primitive human systems. Emerging from the early stages of civilization, capitalism embodies the evolution of private property and serves as the most advanced form of economic organization to date.

Origins and Development

Capitalism’s roots can be traced back to the emergence of private property within early human societies. This transition occurred after the initial primitive system, marking a significant milestone in the development of civilization.

Slavery and Feudalism-The capitalist system originated from owner-slavery, as recognized by Marxism. However, the contradictions inherent within this system gave rise to feudalism, which was predominantly based on agriculture and rural cottage industries. Even today, these elements continue to form the foundation of both pure and mixed forms of capitalism.

Political and Social Systems-The initial stages of capitalism coincided with the establishment of monarchies as the prevailing political structure. Subsequently, other totalitarian systems emerged alongside feudal society and culture, creating a complex web of interconnected institutions.

History and Development of Capitalism

Although the steady development of capitalism as an established system only dates from the 16th century, antecedents of capitalist institutions were present in the ancient world, and flourishing areas of capitalism existed in Europe during the later Middle Ages.

How was capitalism born?

The development of the British textile business during the 16th, 17th, and 18th centuries led to the development of capitalism. The feature of this development that distinguished capitalism from previous systems was the use of accumulated capital to increase productive capacity rather than investing in economically unproductive enterprises such as pyramids and cathedrals. This feature was encouraged by several historical events.

In the ethics promoted by the Protestant Reformation of the 16th century, the traditional disdain for acquisitive endeavors was toned down while hard work and frugality were given a strong theological sanction. Economic inequality was justified on the grounds that the rich were more virtuous than the poor. That is, according to religious belief, there is work in the poor intellect and the rich person is intelligent, so he is more wealthy.

Another contributing factor was the increase in the supply of precious metals in Europe and the resulting price inflation (raising prices). Wages did not rise as fast as prices during this period, and the main beneficiaries of inflation were the capitalists. That is, the capitalists earned maximum profit.

The early capitalists (1500–1750) also took advantage of the rise of strong nation-states during the Mercantile Age. The policies of the national authority adopted by these states were successful in providing the basic social conditions such as a uniform monetary system and legal code necessary for economic development, and ultimately made possible the shift from public to private initiative. That is, capitalism was encouraged.

Capitalist Development in England

The focus of capitalist development in England shifted from commerce to industry in the early 18th century. The stagnant capital accumulation (accumulated wealth) of previous centuries was invested in the practical application of technical knowledge during the Industrial Revolution.

Adam Smith’s Capitalist Thought

The ideology of traditional capitalism was expressed by the Scottish economist and philosopher Adam Smith in ‘An Inquiry into the Nature and Causes of the Wealth of Nations (1776)’, which recommended leaving economic decisions to the free competition of self-regulating market forces.

French Revolution and Capitalism

As the remnants of feudalism were pushed into oblivion after the French Revolution and the Napoleonic Wars, Smith’s policies were increasingly put into practice. Policies of 19th-century political liberalism included free trade, good money (the gold standard), balanced budgets, and a minimum level of relief.

Rise of the Working Class: An Evolutionary Perspective

The emergence of the working class was a consequential outcome of industrial capitalism and the establishment of factory systems during the 19th century. This transformation gave rise to a vast new class of industrial workers, whose deplorable working and living conditions served as a catalyst for Karl Marx’s revolutionary ideology. However, Marx’s prediction of an imminent demise of capitalism through a proletariat-led class war has proven to be shortsighted in contemporary times. This article examines key historical events that have shaped the trajectory of capitalism and influenced the perspectives on the working class.

World War I and Capitalism’s Evolution

The advent of World War I marked a pivotal moment in the development of capitalism. Following the war, international markets contracted, prompting nations to abandon the gold standard in favor of managed national currencies. Additionally, banking dominance shifted from Europe to the United States, and trade barriers proliferated. These transformative changes reshaped the global economic landscape and had profound implications for the working class.

The Great Depression and the Rise of Socialism

The Great Depression of the 1930s shattered the policy of laissez-faire in numerous countries. Intellectuals, writers, artists, and, notably, the working and middle class in Western Europe developed a burgeoning affinity for socialist ideals. The dire socio-economic conditions during this period fueled discontent and a desire for more equitable systems.

Post-World War II and the Welfare State

In the aftermath of World War II, major capitalist nations implemented variations of the welfare state. This approach aimed to address social and economic inequalities, instilling renewed confidence in the capitalist system. As a result, these economies experienced substantial recovery and bolstered faith in capitalism, erasing some of the doubts that had emerged during the 1930s.

The Inequality Crisis and Repercussions

However, the early 1970s witnessed a significant surge in economic inequality, both globally and within individual countries. This growing wealth disparity cast doubt on the long-term viability of the capitalist system. Skepticism resurfaced, questioning the ability of capitalism to provide equitable outcomes for all members of society.

The Financial Crisis and the Resurgence of Socialism

The financial crisis of 2007–2009, coupled with the subsequent Great Recession, reignited interest in socialism, particularly among millennials in the United States. This demographic, heavily impacted by the economic downturn, sought alternative solutions to address systemic flaws in capitalism. The resurgence of socialist sentiments highlighted the need for a more inclusive and fair economic framework.

A Critique of Capitalism: Examining its Instability and Side Effects

Capitalism, lauded for its contribution to economic growth, has garnered both advocates and critics. While acknowledging its positive impact, critics argue that capitalism possesses inherent flaws that stem from its market-driven nature. This article analyzes two key criticisms of capitalism: its unreliability of development and the adverse side effects produced by a profit-oriented production system.

Unreliability of Development: Fluctuations and Concentration of Capital

Critics contend that capitalism suffers from inherent instability, a characteristic that has plagued the system since the advent of industrialization. As capitalism relies on profit expectations, economic growth fluctuates with changes in technological advancements and social opportunities for capital accumulation. Booms emerge as capital rushes to exploit new prospects, leading to economic growth. However, these booms eventually subside as demand saturates, resulting in a cessation of investments, industry shakeouts, and economic recessions. Consequently, economic growth comes at the cost of cyclical market glutes and subsequent downturns.

Marx’s critique in Das Kapital (1867) expands on this instability, arguing that the very process of industrialization and the concentration of capital in larger firms exacerbate disruptions. As each growth cycle halts, successful firms acquire the assets of less successful ones, leading to even more significant disruptions in subsequent economic downturns. Marx believed that this cycle would only end when the working class awakened and capitalism was replaced by socialism.

In the 1930s, John Maynard Keynes presented a less apocalyptic perspective, highlighting capitalism’s failure to recover from crises as a fundamental challenge. Keynes proposed the possibility of capitalism existing in a state of equilibrium with high unemployment, a notion previously inconceivable even to Marx. He suggested that extensive socialization of investment was necessary to overcome stagnation and revive growth.

Quality of Development: Externalities and Social and Ecological Challenges

Critics also scrutinize the adverse side effects of market-driven production, where profitability serves as the sole criterion. Complex industrial societies generate externalities, both positive and negative, as byproducts of production processes. These negative externalities include toxic waste, unhealthy working conditions, and other market-induced issues. Adam Smith warned about the division of labor rendering workers ignorant and alienated due to the pursuit of profit.

Furthermore, technological advancements aimed at cutting labor costs can result in permanent unemployment, as cautioned by economists. Environmental concerns have gained significant attention, given the capacity of industrial processes to surpass the environment’s carrying capacity. Global warming, climate change, and other forms of environmental damage are consequences of unchecked industrial waste and pollution. These challenges, stemming from both socialist and capitalist development, can be attributed to market-driven growth’s inherent focus on profit maximization.

The Issue of Equity in Capitalism: Income Disparities and Market-Determined Distribution

A critical aspect of capitalist growth revolves around the fairness with which wealth is distributed and hardships are shared. This critique takes on both specific and general forms, examining income disparities and the market principle as the regulator of incomes. This article delves into the concerns surrounding equity in capitalist societies.

Income Disparities: Concentration of Assets and Skewed Corporate Rewards

One specific criticism centers on the disparities in income among different segments of the population. An example can be seen in the early 21st century United States, where the lowest quintile of households received a mere 3.1 percent of total income, while the topmost quintile received 51.9 percent. This inequality is a result of asset concentration in the upper brackets and highly skewed patterns of corporate rewards. Chief executive officers of large U.S. companies, for instance, earn an average annual compensation over 300 times that of ordinary office or factory employees.

Market-Determined Distribution: Efficiency and Exploitation

Expanding the critique to a more general level, the market principle itself is often indicted as the regulator of incomes. Proponents of market-determined distribution argue that, with certain exceptions, individuals are paid according to their worth, reflecting their contribution to production. They assert that market-based rewards ensure efficiency in the productive system, maximizing the total income available for distribution.

However, this argument faces counterarguments at two levels. Marxist critics contend that laborers in a capitalist economy are systematically paid less than the value of their work due to the superior bargaining power of employers. They argue that the claim of efficiency masks underlying exploitation. Other critics question the criterion of efficiency itself, which solely considers monetary inputs and outputs, disregarding the moral and social aspects of production. Additionally, this approach excludes workers from expressing their own preferences in making decisions that are most suitable for their firms.

In conclusion, capitalism encompasses several key features, including private property, freedom of enterprise, the profit motive, and limited government intervention. While it offers advantages such as efficiency, innovation, and reduced barriers to trade, there are also disadvantages, including income inequalities, potential monopolies, and environmental challenges. Numerous countries, including Hong Kong, Singapore, and the United States, operate under a capitalist economic system.

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