Capitalism

Capitalism. The term “capitalism” has frequently been used to describe the American economy. The general usage of the term, however, dates to the late nineteenth century and was largely drawn from the multivolume work Das Kapital (Capital) by Karl Marx. Initially used mainly by Marxist critics of capitalism, it came to mean an economic system with private ownership of land and capital, an individual's right to his or her own labor, and the existence of competitive markets that determine prices and quantities for goods and services and for factors of production (land, raw materials, labor, capital). Often it has been defined as free enterprise, or laissez‐faire, describing an economy in which government plays a limited role. Capitalism is, however, a term more frequently used and debated than clearly defined; its precise meaning has seldom been widely agreed upon.

Capitalism has often been contrasted with other basic types of economic systems that preceded or coexisted with it. In the Marxist scheme, all societies followed, or will follow, a predictable set of economic stages. First comes the transition from feudalism to capitalism, leading to freer markets and freer labor, thus permitting rapid economic growth. Capitalism, in turn, would lead to communism, as a result of labor revolt, Marx predicted. In the Cold War Era, social scientists and government leaders drew a sharp political contrast between the capitalist world (the United States and, in some cases, western Europe), and the communist bloc (the Soviet Union, its eastern European allies, and the People's Republic of China), a comparison based on the two blocs' relative economic development and differences in political freedoms. Capitalism's supporters credited it with generating more rapid growth and greater political freedoms than communism.

Some scholars assert that capitalism itself passes through successive stages, reflecting changing economic structures. In the early stages of merchant or commercial capitalism in western Europe, from the sixteenth to the eighteenth centuries, expanding commerce, especially overseas trade with colonial empires, drove the economic system. Industrial capitalism, based on a manufacturing sector and factory production using free labor, followed as the next stage. The final stage, finance capitalism, characterized by V.I. Lenin and others as the highest stage of capitalism, was marked by excess production and savings that needed foreign outlets. Hence, according to this interpretive scheme, imperialism arose in the late nineteenth century to preserve domestic capitalist economies from collapse. Such divisions into stages have been applied more easily to England and to western Europe than to the United States, where, by contrast, capitalism's different stages have generally revolved around changes in the relation of government to business.

American capitalism began with English colonial policy, which established basically free markets internally, combined with mercantilistic regulations to control international trade. Mercantilism, however, under which governments sought to promote home industry and maximize exports, existed alongside most elements of capitalism, such as individual freedoms and the role of markets in internal and external trade. That mercantilism as conventionally defined was not inconsistent with capitalism is apparent from the fact that the newly independent United States adopted a form of mercantilism, using state power to promote economic growth. In the late nineteenth century, the government began to regulate businesses through antitrust legislation and related measures, but throughout the century governments had played an important, positive role in the economy through expenditures to build transportation, tariffs to protect industries, banking controls to police the financial system, and public education to improve human capital. The late nineteenth‐century rise of government economic regulation, however, represented a shift away from earlier governmental stress on the promotion of business and economic growth. Both positive and negative government‐business relationships characterized capitalism, despite the significant shift in the government's role. Even with the growth of regulation, considerable room for competitive markets and freedom of individual choice existed within the economic sphere. Thus, the often proclaimed end of capitalism in the United States has (apparently) not yet occurred.

The term “capitalism” has carried both positive and negative connotations: The positive connotation, as suggested by the title of Carl Snyder's 1940 book, Capitalism: The Creator, celebrates the alleged link between capitalism and political freedom. The negative connotations are clearly conveyed in such terms as “capitalist exploiter,” “capitalist imperialist,” or simply “filthy capitalist.” Praise of capitalists and capitalism has been a central theme among those who desire to limit public restrictions on business behavior, while many reformers and reform movements in U.S. history have emphasized the social costs of “unfettered” or “unbridled” capitalism. Capitalism's critics have focused on how it unevenly distributes income and wealth and also on how the market system trivializes culture.

Capitalism's long‐term survival prospects have been much discussed. During the Great Depression of the 1930s, commentators frequently proclaimed capitalism's decline or demise, often in contrast to the ability of the communist economies to avoid such severe economic collapse. By contrast, the economic revival of the capitalist economies in the post–World War II era, particularly through the 1970s, a period of unusually rapid growth by any historical standard, elicited praise. Social scientists extolled the post–World War II economies alternatively as a return to capitalist principles or as the development of a new economic system with an enlarged governmental role and the introduction of elements of socialism—a hybrid economic system with only some capitalistic elements surviving. Some labeled this “managed capitalism,” reflecting an enhanced government commitment to influence macroeconomic policy (monetary and fiscal policies) as well as to regulate microeconomic behavior of markets. Whether this system will come to be regarded as a new stage of economic and political development or as another example of capitalism's basic adaptability and flexibility remains to be seen.
See also Banking and Finance; Depressions, Economic; Economic Development; Expansionism; Fifties, The; Gilded Age; Industrialization; New Deal Era, The; Progressive Era; Stock Market.

Bibliography

Werner Sombart , Capitalism, in Encyclopedia of the Social Sciences, ed. E.R.A. Seligman, 1930, vol. 3, pp. 195–208.
Louis Hacker , The Triumph of American Capitalism, 1940.
Joseph A. Schumpter , Capitalism, Socialism, and Democracy, 1942.
Carter Goodrich , Government Promotion of American Canals and Railroads, 1800–1890, 1960.
Milton Friedman , Capitalism and Freedom, 1962.
Jonathan R.T. Hughes , The Govermental Habit Redux, 1991.

Stanley L. Engerman