Preconditions and development

Modified capitalism

Capitalism and collectivism


Capitalism is the economic and political system that in its industrial or “full” form first developed in England in the late eighteenth century. Thereafter, it spread over Europe, North America, Australia, New Zealand, and South Africa. Together with its colonial manifestations, it came to dominate the world during the nineteenth century. A limited form of “early” or commercial capitalism, already known in the ancient world, had developed in Italy as early as the thirteenth century and in the Low Countries a century later. This commercial form developed in England in the sixteenth century and began to change into industrial capitalism while elements of feudalism and the guild system still existed.

The United Kingdom during the nineteenth century so faciliated the development and dominated the functioning of capitalism that this country might well have been called the business manager for international capitalism. With the outbreak of World War i, the dominant role in capitalism passed to the United States, coincident with the emergence of changes in the structure and functioning of capitalism. These changes were to culminate, after the Great Depression of the 1930s in the United States, in more important alterations that placed a period to old-style capitalism. The Bolshevik Revolution of 1917 had already ushered in the present era of hostile competition between modified capitalism and collectivist economic and political systems.

The precepts of Adam Smith with respect to the politico–economic system most effective in increasing the wealth of nations furnish the best analysis of the nature of capitalism as it emerged from its commercial or mercantile form into the age of industrial capitalism. Self-interest as ultimately the servant of society, the minimization of the role of the state, and the institution of private property constituted the essence of capitalism in the nineteenth and early twentieth centuries. Yet neither Smith nor his successors among the classical and neoclassical economists used the term “capitalism.” While Karl Marx rarely, if ever, used the noun “capitalism,” his use of the adjectives “capitalist” and “capitalistic” fastened the term on the modern economic systems of Europe and the United States.

Although it is useful to follow the Marxist pattern to some extent in the analysis of capitalism and its development, it is even more useful to compare capitalism with existing collectivist economic systems. These two comparisons are not at all the same thing. While the Soviet, the Chinese, and the Yugoslav economic systems owe their origins to Marx, they all depart in the most drastic fashion from the kind of society which Marx had envisaged as the successor to capitalism. Not only do they depart from the model, however incompletely shadowed forth by Marx, but they depart by different roads.

Preconditions and development

The seeds of capitalism can be found in the propensity in human nature “to truck, barter and exchange one thing for another” (Smith [1776] 1952, p. 6). There was doubtless never a stage in human history in which this propensity did not exist. It is a long step, however, from this to the entrepreneur who becomes a specialist in trucking and bartering and makes his living by the turnover of his stock of capital. History is replete with examples of the energy and ingenuity with which the rising merchant classes adapted existing laws and customs to their needs. The sea loan in Genoa in the twelfth and thirteenth centuries, devised under the guise of marine insurance to circumvent the laws against usury, is a case in point.

A surplus above subsistence is the precondition for the existence of all even slightly advanced forms of social organization, but neither the resulting economic system nor the political system need be capitalistic. The political system largely determines what classes and what individuals will be the recipients of the surplus above subsistence. Thus, “surplus value” in this sense existed both in feudal society and in the Egypt of the Pharaohs, but in neither case was a bourgeois class its recipient. Capital accumulation took place under commercial capitalism out of the profits of merchants, quite independent of the employment of workers for wages.

History shows extremely diverse patterns of economic development. In Babylonia, in the city-states of classical Greece, in Phoenicia, in Carthage, in the Hellenistic states of the Mediterranean littoral, and in the Roman Empire, there developed, during different ages, what might be called commercial capitalism. There was, however, little uniformity of economic and political institutions in these variant national forms of commercial capitalism. In ancient Egypt, for example, there existed a monarchic state capitalism, with the surplus above subsistence put at the disposal of the priestly and military bureaucracy in the service of the Pharaoh.

Even where merchant capitalism existed in the ancient world, large-scale applications of improved technology to goods production did not occur. In Rome, where many of the elements of commercial capitalism existed and where Roman law had become in some respects more “capitalistic” than current English and American law, the “next stage of capitalism” did not develop. Without an industrial technology, there could be no industrial capitalism.

It is equally true that until the political and economic institutions of modern capitalism developed, there could be no application of improved technology to large-scale production. We know that, repeatedly, national forms of commercial capitalism were destroyed by foreign conquest, by social conflict, and by barbarian invasion, or they simply died out. Instead of organic growth from a simpler to a more complex form of politico–economic system, there was until the eighteenth century in western Europe, in every case, a relapse.

Nor is feudalism an inevitable stage in the development of capitalism. Commercial capitalism existed in various countries in the ancient world without a prior stage resembling the feudalism of the Middle Ages in Europe. Industrial capitalism came into existence in the United States, in Canada, and in Australia without a prior stage of feudalism. By a rather heroic oversimplification, the precapitalistic era in Japan might be termed feudalism. In these cases, capitalism was an importation from more advanced countries. In some of the presently underdeveloped countries of the world, which were previously colonial, the stage of capitalism is now being “skipped” in favor of some form of collectivism.

Capital accumulation and the entrepreneur

The entrepreneur, assuming the risk in return for the expectation of profits of mercantile ventures in the early stages of capitalism, and of introducing new technology in the stage of industrial capitalism, played the crucial role in the development of capitalism. Schumpeter (1942) has pointed out that the entrepreneur was always dependent upon not only the accumulation of his own capital but also the aggregation of the capital of others. The financial resources upon which industrial capitalism was based had to pass directly or indirectly into the hands of entrepreneurs, through withholding or transferring income from the nonbourgeois elements—feudal landlords, monasteries, peasants, and laborers. Capital thus came into the hands of the bourgeoisie, who would save it, and then passed into the hands of entrepreneurs, who invested it, rather than remaining in the hands of those who would have consumed it.

For capital to be saved and invested by entrepreneurs, a minimum level of peace, law, and order was, and is, necessary. Capitalism has survived numberless wars, domestic disturbances, and even revolutions. There have been international rivalries involving struggles for colonies and spheres of influence. Innumerable individual capitalist entrepreneurs have, indeed, made huge profits out of war. Yet capitalism cannot function if violence is too great or if it is continuous. There must be substantial pauses between wars and revolutions. Government must be able to prevent mob violence. The typical entrepreneur of early capitalism, unlike the feudal lord, was unwarlike by temperament and motivated by the search for profit. Bourgeois civilization, compared with the forms of social organization that preceded it or with the totalitarian forms that now compete with it, has remained inherently peaceable, rationalistic, and materialistic.

Liberty and democracy

The enforcement of commercial contracts by the state and the extension and protection of property rights—all essential to the development of capitalism—required a strong government. The process of saving, investment, risk-taking, and profit-making flourished best, however, when the powers of the state were restricted so that their exercise would not be arbitrary. The modern parliamentary, democratic state, with a “bill of rights” protecting the individual against the arbitrary power of the state, was the eventual product of capitalism. The democratic political aspects of the later capitalistic state did, indeed, often result from the demands of the noncapitalistic classes of the population and were reluctantly accepted by capitalists. The capitalist then came to realize that the more democratic the parliamentary state became, the more limitations on the power of the state were necessary to protect him against the masses. Political democracy and a government of limited powers thus came to be closely linked with modern capitalism. This kind of political system is obviously not characteristic of the collectivist states which are in competition with capitalism as alternative politico–economic systems.

Competition and laissez-faire

A formalized model of old-style capitalism would be characterized by pure and perfect competition in factor and product markets, complete laissez-faire, absolute private-property rights, individual enterprise, and a zero level of all but frictional involuntary unemployment. This formal model, however, has inherent limitations and contradictions that prevented its existence as an actual economic system.

Complete laissez-faire and pure and perfect competition have never been attained, even during the early stages of industrial capitalism. Not all of the laws and customs of feudalism, the guild system, and mercantilism had been eliminated when there began to develop new processes and institutions that also were inconsistent with a formal model of laissez-faire and competition. Some forms and degrees of competition were essential if unregulated production, exchange, and distribution were to be relied upon to maximize the social product. Yet the new processes and institutions either reduced competition or profoundly changed its nature. Large corporations, while reducing the number of competitive enterprises, were essential to lowered costs of production and prices. The formation of trusts, cartels, and a multiplicity of other forms of restraint of trade manifestly reduced competition. Antitrust legislation might protect competition, but these laws obviously involved a breach of the principle of laissez-faire. [SeeCompetition; Laissez-faire.]

The organizational economy

In the United States, the political decision, accompanied by much argument among economists, was to attempt to maintain competition by legislation, even at the cost of the principle of laissez-faire, in those industries that were not natural monopolies. Where the maintenance of competition was obviously impossible, state and federal regulation was substituted. In Great Britain, where until very recent times there was no such antitrust legislation, only the unenforceability of contracts in restraint of trade was relied upon to supplement the self-eroding tendencies of such agreements. Thus, in Great Britain, laissez-faire was maintained at the expense of competition. In Germany, cartels were not only permitted, but their contracts were in some cases enforceable at law. Both laissez-faire and competition were largely emasculated. Yet in all three countries large-scale corporate industry grew and the role of individual enterprise diminished. Quasimonopolistic and oligopolistic institutions and practices, “price leadership,” “administrative pricing,” and other forms of imperfect competition in the markets for factors, goods, and services, as well as the transfer of control of corporations from capitalist-owners to management, meant that the capitalism had undergone a profound change. [SeeAntitrust legislation; Cartels and trade associations; Corporation; Oligopoly.]

There was still another contradiction with respect to the role of competition under capitalism. Technological progress under capitalism depends upon the possibility of a temporary monopoly profit for the innovator. Schumpeter’s picture (1942) of the temporarily high rate of profit attained by the innovator serving to rescue the economy from the depressing effect of competition upon the rate of return from capital has substantial validity. J. M. Clark (1961) has also pointed out that for competition to be “workable” it need not be perfect, and this position is generally accepted by most economists.

Modified capitalism

The institution of private property, so basic to capitalism and so essential to its functioning, had always involved a serious contradiction in its claim to serve the best interests of society by the allocation of personal income through the market. “From each according to his ability, to each according to his productivity” was obviously defective so long as one’s distributive share was also determined by the productivity of one’s property. The institution of private property could be insulated for a long time against the ultimate logic of political democracy by a variety of legal devices. In the United States, for example, the fifth and fourteenth amendments to the constitution were used for this purpose. With the coming of the New Deal in the early 1930s, however, it became impossible to maintain the sacrosanct character of private property. A series of decisions by the Supreme Court validating New Deal legislation removed the constitutional barrier to governmental action in the economic field.

In Europe, by the late nineteenth and early twentieth centuries, the growing power of the lower-income classes was responsible for the amelioration, through political action and labor union activity, of conditions of work and of inequality in the distribution of wealth and income. This insistence by the working classes on departing from the European variant of old-style capitalism reflected a real hostility to the system. There was, indeed, not only hostility to capitalism, but hope of attaining some sort of socialism as an alternative.

The New Deal

In the United States the combination of massive unemployment and the collapse of farm prices in the 1930s brought about popular demand for governmental intervention in, and control of, many elements in the economy not previously controlled. The great series of legislative and administrative measures by which the government came to play a larger and larger role in the economic system was never admitted to be anticapitalistic by the Roosevelt administration. On the contrary, all of these measures were represented as essential to prevent the collapse of capitalism. The charge by conservatives that these measures represented “creeping socialism” never received popular support.

The series of economic measures of the New Deal, including control of agricultural prices, production, and marketing; the sanctioning and support of collective bargaining; social security legislation; the increase in the progressivity of income taxes; regulation of the security exchanges; increased governmental control over money and banking; the conscious use of deficit financing; the great increase in the proportion of national income flowing through the governmental budget; and the great increase in the proportion of the labor force in governmental employment, meant a significant change in the capitalistic system. The later legislative acceptance, which came about after World War ii, of the responsibility of the federal government to attempt to maintain full employment represented another step in the same direction. All these changes served to differentiate modified capitalism from old-style capitalism. [SeeWelfare state.]

While these changes in American capitalism brought about by the New Deal were generally resisted by upper-income classes in the United States, they were eventually accepted as inevitable. American industrialists even began sometimes to refer to the existing economic system as “people’s capitalism.” Another approach saw capitalism in the United States as the “affluent society,” with both old-style competition and old-style monopolistic practices superseded by “countervailing power” that could be relied upon to maintain a balance between large buyers and large sellers and between labor unions and industrial giants—with governmental power exerted to aid economic groups whose organizational potentialities were small (Galbraith 1952). Communists deny vehemently the concepts of a “people’s capitalism” or of a Galbraithian affluent society and insist that the United States is still in the last stage of capitalism—”monopoly capitalism.”

Renewed support for free market capitalism

There has arisen, however, since the end of World War ii, a group of economists in the United States, West Germany, and Switzerland, organized as the Mont Pelerin Society, who deny the existence of a third stage of capitalism by whatever name. In particular, they deny that the capitalistic system is less competitive than it ever was. They point out that there has been no sharp increase in industrial concentration in the United States during recent decades. They argue that the larger size of corporations means lower costs of production, particularly through massive research expenditures, and hence more effective competition than ever. [SeeEconomies of scale; Industrial concentration.] They do not concede that the pricing process of “competition among the few” differs from the atomistic competition of individual enterprises; or they do not admit the significance of such a difference if it does exist.

They consider almost all of the recent extension of the sphere of government to have been unnecessary and to have caused mal-allocation of resources. Although it would be politically difficult to accomplish, they believe most governmental controls could be stripped away, as was done with much of the system of controls in West Germany after the destruction of the Nazi system and the end of the Allied occupation. These economists have idealized and vigorously advocated the “social free market economy.”

Capitalistic pluralism

In any case, the current forms of capitalism in all countries are characterized by a high degree and wide extent of pluralism. The role of the individual, within and among the corporate organizational forms that have come to characterize capitalism, remains important. Corporations still compete with each other even though the forms of competition have changed. The managements of corporations and the managements of labor unions carry out collective bargaining, not without governmental intervention, but at least without continuous government dominance. The process by which the managements of corporations and of labor unions come into power is highly complex and differentiated, but it is not dominated by government. Separation of economic and political powers is still characteristic.

The freedom of individuals under capitalism to undertake the production of any product or service where profit appears attainable is accompanied by the widest diversity in organizational forms. In collectivist economic systems only state authority can sanction production, and organizational forms are rigidly prescribed. Totalitarian regimes do not tolerate the existence of associations which are not closely controlled by the one-party state. Voluntary and spontaneous organization of individuals consequently cannot exist. Since capitalism can hardly be said to have an ideology, its economic pluralism is complementary to its pluralism in political, social, and cultural activities and organizational forms.

Capitalism and collectivism

Economists who conceived of a third stage of “late capitalism” as did Sombart (1902) and Schumpeter (1942), thought of capitalism as being on the eve of replacement by quite a different economic system. To this limited extent, they were in agreement with Lenin who had alluded in his State and Revolution (1917) to “monopolistic capitalism” as the latest phase of capitalism. There was both divergence of views and uncertainty about the nature of the successor economic system, but there was agreement that it would be a collectivist economic system. Whether such a collectivist economic system would take the form of democratic socialism or of a Soviet or a Nazi type of totalitarian state was a cardinal point of disagreement. Those who visualized the successor system to capitalism as democratic socialism assumed that the transformation would be gradual and peaceful. Those who foresaw the coming of a totalitarian economic and political system inevitably visualized the change as revolutionary and violent.

It is clear that there is no one historical process operative in all countries that eliminates capitalism and produces basically identical economic and political systems that could be called socialist. The communists looked upon the Nazi economic and political system in Germany as the very embodiment of monopoly capitalism, the last stage, to be followed by its revolutionary overthrow and the dictatorship of the proletariat. The Nazis visualized their form of the totalitarian state as the successor to bourgeois capitalism, but different from it in the most basic way. Yet, the economic system of the economically most important part of Germany today conforms neither to the Nazi nor to the Soviet forms of the totalitarian state, any more than the Soviet totalitarian state conforms to the Marxist model. Instead, the current economic system of West Germany approaches the economists’ theoretical model of competition and laissez-faire more nearly than did the pre-Hitler German economic system.

It is equally clear that where collectivist economic systems have come into existence, they did not follow upon any stage of “late capitalism.” Whether in the case of Soviet Russia, of communist China, of the communist states of eastern Europe, or of Cuba, the predecessor economic system in no instance had been characterized by highly developed industrialism and often could hardly have been designated as capitalistic. Furthermore, the economic systems of these noncapitalistic countries differ radically each from the other. The economic system of communist China is very different from that of Soviet Russia, and the economic system of Yugoslavia differs from both. Their political systems do have similarities. Since they are totalitarian, they are one-party states. They have neither free elections nor real parliamentary government. There is no protection of the individual against the power of the state. The personal dictator plays a major role. It is in the political systems of these collectivist economic systems that the greatest differences from capitalism exist.

The process of change from “old-style capitalism” to modified capitalism differed in detail between the United States and western Europe. At one time it appeared that the Social Democratic parties of western Europe and the Labour party of the United Kingdom might bring about the transformation of modified capitalism into democratic socialism through the gradual nationalization of industry. The movement toward further nationalization of industry in both the United Kingdom and in western Europe has now lost momentum. It is not even any longer seriously advocated by the socialist parties of western Europe. There is little evidence that nationalization in those industries where it occurred materially reduced inequality in income distribution or that it improved the productivity of labor through any change in motivation. Govermental planning of investment and wage and price levels, in cooperation with labor organizations and employer organizations, varying in kind and detail from country to country, has afforded a psychological substitute for nationalization. The high rate of increase in real wages, even if causing serious problems of “cost-push” inflation, has likewise greatly strengthened popular support for the current “mixed” form of economic system. Consequently, the prospect in western Europe for a change from the existing forms of capitalism to some form of collectivist economic system by democratic and parliamentary means has faded.

The majority of the underdeveloped countries, such as India, Burma, Indonesia, Egypt, Algeria, and the sub-Saharan countries of Africa, which have just emerged from colonial rule, have repudiated capitalism and have proclaimed a socialist economic system as a goal to be attained as soon as feasible. These countries, however, cannot nationalize nonexistent industries and hence cannot go over at once to a modern type of collectivized economy. Radical movements in Latin America, sometimes dominated by communists, are also anticapitalistic. They tend to favor “socialism” on the Cuban model. Whether the goal of socialism, of a democratic or totalitarian form, will remain the national objective depends in part upon the rate of economic growth of countries that adhere to the current form of capitalism, compared with that of nations such as the Soviet Union, China, and Yugoslavia with their variant forms of collectivist economic systems. [SeeNationalization; Planning, economic.]

Economic organization in capitalistic and collectivist systems

The organization of modern capitalistic business corporations has come to resemble that of governmental corporations and bureaus. There are also obvious similarities in organization and operation between a Soviet trust and a large capitalistic corporation, just as there are similarities between governmental bureaus or public corporations, such the Tennessee Valley Authority or the Port of London Authority, and private corporations, such as the United States Steel Corporation or the Imperial Chemical Company, Ltd.

The role of profits and interest in capitalistic countries remains, indeed, vastly more important than in Soviet-type economic systems. Nevertheless, crude substitutes for the interest rate as an allocator of investment funds in the Soviet economy have been developed, and there have recently been proposals for allowing profits to play a role in Soviet industry more nearly like that in capitalistic countries. There has likewise been some effort through the reorganization of Soviet industry to allow the market to have a greater role in price determination. [SeeCommunism, economic organization of.]

The managerial class

The “New Class” that makes up the bureaucracy which manages the Soviet or the Chinese or the Yugoslav economy and the governments of these countries as well, decides on the division of the social product between consumption and investment and between labor in industry and labor in agriculture. It decides as well on the more detailed divisions between the different branches of industry, between skilled and unskilled labor, and so on. This “New Class” has obvious similarities to the managerial class of current capitalism. The compensation of the managers of a collectivist economy in salaries, bonuses, and other fringe benefits is of major importance in their decision making. They are not restricted by the market or by the managers of labor unions when they decide how much they should withhold for themselves from laborer-consumers. Government and party officials, army and police officers, labor union leaders, managers of collective farms, and industrial managers are all part of an undifferentiated ruling hierarchy. The constraints of free elections and of parliamentary government upon managerial decisions are absent.

The managerial class under corporate capitalism, like the “New Class” in Soviet-type economies, also determines in large measure its own compensation—but within the constraints of the market, of government, and of the counterclaims of the managers of labor unions. To the extent that top management of corporations is independent of stockholder control, however, salaries, “incentive” stock options, expense accounts, and other fringe benefits are not effectively limited by market constraints.

Comparative ethics

Critics in the past attacked capitalism especially on the ground that an economic system based upon self-interest and the pursuit of profit was essentially without social ethics. It was confidently asserted that a system of socialism would increase social motivation. In consequence, the coercive functions of the state could then be greatly curtailed or even eliminated. The record of the countries having collectivist types of economic systems affords no evidence to support this conclusion. There is no evidence that workers or managers in collectivist economic systems work more willingly and efficiently than do those under capitalism. The Soviet Union and every other collectivist type of economic system have had to resort to incentive payments to compensate for higher skills, greater productivity, or greater responsibility in management. There has been no evidence at all that economic crimes such as embezzlement, speculation, and theft have declined in Soviet Russia as the “heritage of capitalistic motivation” faded into history.

In every society, whether capitalistic or collectivist, the ethical problem of how the managerial class is to determine its own compensation arises. Since the managements of modern capitalistic corporations typically are autonomous with respect to their stockholders, new ethical problems inevitably have arisen. Is profit maximization for the benefit of the stockholders to continue to be the primary goal of management, as was true under old-style capitalism? Even if profits are maximized, what are the ethical limits on the management’s power to withhold these profits from the stockholders—in the form of stock options, large pension arrangements, and the like—for the benefit of management? There have been innumerable flagrant cases of such withholding in the United States in recent decades.

Economic stability

Capitalism is currently not plagued, as it seemed to be during the economic depression of the 1930s, by the threat of a Keynesian-type depression. There is currently no lack of investment outlets for savings. These investment outlets have earnings above that minimum rate of interest which Keynes envisaged as inhibiting further saving in an affluent society and which “can interfere, in conditions mainly of laissez-faire, with a reasonable level of employment and with the standard of life which the technical conditions of production are capable of furnishing” (1936, p. 219). Capitalistic countries have learned to cope with this kind of general deficiency in purchasing power, but they are still periodically faced with the choice between unemployment and rising prices.

Economic growth rates

In statistical comparisons of the annual rate of economic growth of capitalistic countries with that of the Soviet economy, the rates the Soviets claimed, in the early years, of 15 and even 20 per cent must be discarded as quite unreal. A rate of increase of some 6 per cent per annum during the period of the 1950s may be taken to represent reality. This was almost double the United States rate of increase of some 3l/2 per cent during the same period. While the higher rates continued, they reduced somewhat the relative disparity between the standard of living of the Soviet Union and capitalistic countries. The absolute disparity remains great and in the most recent years has even been growing. In recent years the rate of increase in Japan, for example, has been substantially higher than that of the Soviet Union. By the early 1960s, the rate of economic growth in the Soviet Union had begun to decline and has now fallen to a rate little, if any, above that of the United States or the countries of western Europe. Very slow capital construction has largely offset high rates of saving and investment.

The rate of economic growth in the Soviet Union, as in all other collectivist economies, has been held down by the extremely low efficiency of agricultural production. By contrast, the increase of efficiency in agricultural production in substantially all capitalistic countries has led to serious surplus problems. Access to the surplus agricultural production of capitalist countries has frequently saved communist countries from serious shortages. The failure of the “great leap forward” has, at least temporarily, discredited Chinese communism as a means of attaining economic growth.

Income distribution

Statistical evidence indicates the extent to which the masses of the population of capitalistic countries have benefited from economic growth. Improvements in productivity as a result of better technology and education have played a much larger role in increases in per capita production in the United States than have increases in the quantity of capital. A recent study for the National Bureau of Economic Research (Kendrick 1961) estimates that in the United States improvements in productivity accounted for about four-fifths of the per capita increase in production over the period 1919−1957. The same study estimates that labor obtained over 90 per cent of this productivity increment and that labor’s share of the national income increased from a little more than 70 per cent in 1919 to slightly more than 80 per cent in 1957. This estimate is supported by another study of the bureau, which found that wages in manufacturing in the United States in 1954, the last year of the study, were about 86 per cent of total income, with capital receiving 14 per cent (after taxes). For the period 1939−1954, the average of the wage share was above 80 per cent (Stigler 1963). Efforts have been made to explain away the increase in labor’s share which the raw data show. Some economists even claim that the shares have remained virtually unchanged over time.

It has become ever more difficult in current capitalism to separate capital as a factor of production from capital as merely the functional recipient of a distributive share. New capital construction reflects new technology rather than simply quantitative replacements of, or additions to, the stock of capital. Investment in research, which in accounting terms is a corporate expense rather than an addition to capital, has enormously increased. Similarly, labor is losing its identity as a factor purchased by the capitalist for its physical productivity. Clerical workers, salesmen, managerial personnel, engineers, and research scientists and their assistants constitute a larger and larger proportion of the labor force as automation progresses.

The findings of Simon Kuznets (1963) with respect to the decline in inequality of income in the United States are consistent with the trend of an increase in labor’s share. Some recent indications of a partial reversal of this trend toward greater equality in income distribution do not offset the declining trend in inequality during the last 40 years. Kuznets has conjectured that the early effects of capitalistic industrialization may have been to increase inequality in income distribution while the later effects tend to narrow inequality. He has found that inequality is greater now in the under-developed countries than in the developed countries characterized by the current forms of capitalism.

In spite of obesity taking the place of hunger as a problem in modern capitalistic countries, poverty remains a problem for a substantial fraction of the population. In the United States, perhaps 20 per cent of the population still receive incomes below an adequate minimum. These people are largely the aged, those from broken families, minority groups, the undereducated, and the unemployed. These are, of course, overlapping categories. It is not capitalism’s inability to produce national income that is responsible for these remnants of poverty. It is rather sectoral, organizational, and distributional difficulties, which have not yet been overcome. [SeeIncome distribution; Poverty.]

Prospects for the survival of modified capitalism

There is no longer any prospect for the outright, peaceful replacement of capitalism by socialism. Capitalism in all countries where it still exists has come to contain elements formerly associated with socialism. The further development of social security legislation; a continuation of redistribution of income through legislative measures and labor union activities; and the development of institutions for tripartite economic planning by government officials, the management of labor unions, and corporate managements have blurred the separation between socialism and capitalism.

Although the Soviet press still retains the habit of speaking of one “socialist camp” as opposed to the “capitalist camp,” the recent histories of Soviet Russia, Yugoslavia, and communist China demonstrate that no such homogeneous “socialist camp” exists, either in terms of the organization and functioning of the economic systems, or in terms of the degree of hostility toward capitalistic countries.

The possibility of the overthrow of capitalistic governments by armed force cannot be excluded. Yet, it is no longer inevitable, or even likely, that in the event of armed conflict all communist countries would be united against capitalistic countries. The likelihood of global nuclear devastation if war does break out, however, removes this eventuality from the realm of economic or political analysis.

Calvin B. Hoover


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CAPITALISM is an economic system dedicated to production for profit and to the accumulation of value by private business firms. In the fully developed form of industrial capitalism, firms advance money to hire wage laborers and to buy means of production such as machinery and raw materials. If the firm can sell its products for a greater sum of value than that originally advanced, the firm grows and can advance more money for a new round of accumulation. Historically, the emergence of industrial capitalism depends upon the creation of three prerequisites for accumulation: initial sums of money (or credit), wage labor and means of production available for purchase, and markets in which products can be sold.

Industrial capitalism entails dramatic technical change and constant revolution in methods of production. Prior to the British Industrial Revolution of the eighteenth and early nineteenth centuries, earlier forms of capital in Europe—interest-bearing and merchant capital—operated mainly in the sphere of exchange. Lending money at interest or "buying cheap and selling dear" allowed for accumulation of value but did not greatly increase the productive capabilities of the economic system. In the United States, however, merchant capitalists evolved into industrial capitalists, establishing textile factories in New En-gland that displaced handicraft methods of production.

Capitalism is not identical with markets, money, or greed as a motivation for human action, all of which predated industrial capitalism. Similarly, the turn toward market forces and the price mechanism in China, Russia, and Eastern Europe does not in itself mean that these economies are becoming capitalist or that all industrial economies are converging toward a single form of economic organization. Private ownership of the means of production is an important criterion. Max Weber stressed the rational and systematic pursuit of profit and the development of capital accounting by firms as key aspects of modern capitalism.

In the United States the three prerequisites for capitalist accumulation were successfully created, and by the 1880s it surpassed Britain as the world's leading industrial economy. Prior to the Civil War, local personal sources of capital and retained earnings (the plowing back of past profits) were key sources of funds for industry. Naomi Lamoreaux has described how banks, many of them kinship-based, provided short-term credit and lent heavily to their own directors, operating as investment clubs for savers who purchased bank stock to diversify their portfolios. Firms' suppliers also provided credit. Capital from abroad helped finance the transport system of canals and railroads.

During the Civil War, the federal government's borrowing demands stimulated development of new techniques of advertising and selling government bonds. After the war, industry benefited from the public's greater willingness to acquire financial securities, and government debt retirement made funds available to the capital market. In the last decades of the century, as capital requirements increased, investment banks emerged, and financial capitalists such as J. P. Morgan and Kuhn, Loeb and Company organized finance for railroads, mining companies, and large-scale manufacturers. However, U.S. firms relied less on bank finance than did German and Japanese firms, and, in many cases, banks financed mergers rather than New investment.

Equity markets for common stock grew rapidly after World War I as a wider public purchased shares. Financial market reforms after the crash of 1929 encouraged further participation. However, internal finance remained a major source of funds. Jonathan Baskin and Paul Miranti noted (p. 242) that between 1946 and 1970 about 65 percent of funds acquired by nonfinancial corporate businesses was generated internally. This figure included retained earnings and capital consumption allowances (for depreciation). Firms' external finance included debt as well as equity; their proportions varied over time. For example, corporate debt rose dramatically in the late 1980s with leveraged buyouts, but in the 1990s net equity issuance resumed.

Labor for U.S. factories in the nineteenth century came first from local sources. In textiles, whole families were employed under the Rhode Island system; daughters of farm households lived in dormitories under the Waltham system. Immigration soared in the 1840s. Initially, most immigrants came from northern and western Europe; after 1880, the majority were from southern and eastern Europe. After reaching a peak in the decade before World War I, immigration dropped off sharply in the 1920s–1930s. It rose again in the 1940s and continued to climb in subsequent decades. The origins of immigrants shifted toward Latin America, the Caribbean, and Asia. Undocumented as well as legal immigration increased. For those lacking legal status, union or political activity was especially risky. Many were employed in the unregulated informal economy, earning low incomes and facing poor working conditions.

Thus, although an industrial wage labor force was successfully constituted in the United States, its origins did not lie primarily in a transfer of workers from domestic agriculture to industry. Gavin Wright (1988, p. 201) noted that in 1910 the foreign born and sons of the foreign born made up more than two-thirds of the laborers in mining and manufacturing. Sons of U.S. family farmers migrated to urban areas that flourished as capitalism developed, but many moved quickly into skilled and supervisory positions in services as well as industry, in a range of occupations including teachers, merchants, clerks, physicians, lawyers, bookkeepers, and skilled crafts such as carpentry. Black and white sharecroppers, tenant farmers, and wage laborers left southern agriculture and found industrial jobs in northern cities, particularly during World War II. But by the 1950s, job opportunities were less abundant, especially for blacks.

Family farms using family labor, supplemented by some wage labor, were dominant in most areas outside the South throughout the nineteenth century. But in the West and Southwest, large-scale capitalist agriculture based on wage labor emerged in the late nineteenth century. Mechanization of the harvest was more difficult for fruits, vegetables, and cotton than for wheat, and a migrant labor system developed, employing both legal and undocumented workers. In California a succession of groups was employed, including Chinese, Japanese, Mexican, and Filipino workers. Labor shortages during World War I led to federal encouragement of Mexican immigration, and Mexicans remained predominant in the 1920s. They were joined in the 1930s by migrants from Oklahoma and other Plains and southern states. Federal intervention during World War II and the 1950s established bracero programs to recruit Mexican nationals for temporary agricultural work.

An extraordinary home market enabled U.S. capitalists to sell their products and enter New rounds of accumulation. Supported by the Constitution's ban on inter-state tariffs, preserved by Union victory in the Civil War, and served by an extensive transportation and communication network, the U.S. market by the 1870s and 1880s was the largest and fastest-growing in the world. Territorial acquisitions included the Louisiana Purchase of 1803, which nearly doubled the national territory, and the Mexican cession, taken by conquest in 1848 and including the area that became California. Although some acquisitions were peaceful, others illustrate the fact that capitalist development entailed violence and nonmarket coercion as well as the operation of market forces. Growth in government spending, particularly during and after World War II, helped ensure that markets and demand were adequate to sustain accumulation.

According to Alfred Chandler, the size and rate of growth of the U.S. market opened up by the railroads and telegraph, together with technological changes that greatly increased output, helped spawn the creation from the 1880s of the modern industrial enterprise, a distinctive institutional feature of managerial capitalism. Using the "visible hand" of salaried managers, large firms coordinated vast quantities of throughput in a sequence of stages of mass production and distribution. Chandler thought these firms were more efficient than their competitors, but other scholars argued their dominance rested at least partly on the deliberate creation of barriers to entry for other firms. These included efforts to monopolize raw materials and other practices restricting competition, such as rebates, exclusive dealing, tariffs, patents, and product differentiation.

Technological changes included the replacement of handicraft methods using tools and human or animal power by factories with specialized machinery and centralized power sources. Nineteenth-century U.S. capitalism was notable for two industrial processes: the American System of interchangeable parts, which eliminated the need for skilled workers to file parts (of firearms, for example) to fit together as they did in Britain; and continuous-process manufacture in flour mills and, later, factories with moving assemblies such as automobile factories. Public sector institutions played an important role in some technological developments. The Springfield armory promoted interchangeable parts in the early nineteenth century. Government funding of research and development for industry and agriculture assisted private accumulation by capitalist firms in the twentieth.

Organizational and technological changes meant that the labor process changed as well. In the last decades of the nineteenth century, firms employed semiskilled and unskilled workers whose tasks had been reduced to more homogenized activity. Work was closely supervised by foremen or machine paced under the drive system that many firms employed until the 1930s. "Scientific management," involving detailed analysis of individual movements, optimum size and weight of tools, and incentive systems, was introduced, and an engineering profession emerged.

In the early twentieth century, "welfare capitalism" spread as some firms provided leisure activities and benefits, including profit sharing, to their workers, partly to discourage unionization and reduce labor turnover. As Sanford Jacoby documented, higher worker morale and productivity were sought through new personnel management policies such as job promotion ladders internal to firms. Adoption of bureaucratic employment practices was concentrated in times of crisis for the older drive system—World War I and the Great Depression. In the 1930s, union membership also expanded beyond traditional craft unions, as strike tactics and the rise of industrial unions brought in less skilled workers. During and after World War II, union recognition, grievance procedures, and seniority rules became even more widespread. Capitalism rewarded relatively well those in primary jobs (with good wages, benefits, opportunities for promotion, and greater stability). But segmented labor markets left many workers holding secondary jobs that lacked those qualities.

Capitalism, the State, and Speculation

Capitalism involves a combination of market forces, non-market forces such as actions by the state, and what can be termed hypermarket forces, which include speculative activities motivated by opportunities for large, one-time gains rather than profits made from the repeated production of the same item. In some cases state actions created opportunities for capital gains by private individuals or corporations. In the United States, federal land grants to railroad companies spurred settlement and economic development in the West in the nineteenth century. Profits often were anticipated to come from increases in land values along railroad routes, particularly at terminal points or junctions where towns might grow, rather than from operating the railroads.

Similarly, from the mid-twentieth century, federal highway and dam construction and defense spending underpinned city building and capitalist development in the southern and western areas known as the U.S. Sun Belt. In the 1980s, real estate speculation, particularly by savings and loan institutions, became excessive and a threat to the stability of the system rather than a positive force. The corporate merger and takeover wave of the 1980s also showed U.S. capitalism tilting toward a focus on speculative gains rather than on increases in productive efficiency.

In the judicial sphere, the evolution of legal doctrines and conceptions of property in the United States during the nineteenth century promoted capitalist development. As Morton Horwitz explained, in earlier agrarian conceptions, an owner was entitled to absolute dominion and undisturbed enjoyment of a property; this could block economically productive uses of neighboring properties. At the end of the eighteenth century and beginning of the nineteenth century, the construction of mills and dams led to legal controversies over water rights that ultimately resulted in acceptance of the view that property owners had the right to develop properties for business uses. The taking of land by eminent domain facilitated the building of roads, canals, and railroads. Legal doctrines pertaining to liability for damages and public nuisance produced greater predictability, allowing entrepreneurs to more accurately estimate costs of economic improvements. Other changes affected competition, contracts, and commercial law. Horwitz concluded that by around 1850 the legal system had become much more favorable to commercial and industrial groups.

Actions by the state sometimes benefited industrial capitalism as an unintended consequence of other aims. Gavin Wright argued that New Deal farm policies of the 1930s, designed to limit cotton production, undermined the sharecropping system in the U.S. South by creating incentives for landowners to switch to wage labor. Along with minimum wage legislation, the demise of sharecropping led the South to join a national labor market, which fostered the region's development. Elsewhere, capitalist development was an explicit goal. Alice Amsden showed that beginning in the 1960s, the South Korean state successfully forged a reciprocal relation with firms, disciplining them by withdrawing subsidies if export targets were not met. It set priorities for investment and pursued macroeconomic stabilization policies to support industrialization.

State action also affected the relationship between capital and labor. In the United States, federal and state governments fiercely resisted unions during the late nineteenth century with injunctions and armed interventions against strikes. Federal legislation of the 1930s and government practices during World War II assisted unions in achieving greater recognition and bargaining power. But right-to-work laws spread in southern and western states in the 1940s and 1950s, the 1947 Taft-Hartley Act was a major setback for labor, and the federal government turned sharply against unions in the 1980s.

Varying combinations of ordinary market forces, state action, and speculative activity generated industrial capitalism by the late twentieth century in an increasing but still limited group of countries. Western Europe, which had seen a protracted transition from feudalism to capitalism, was joined in the nineteenth and early twentieth centuries by white settler colonies known as "regions of recent settlement," such as the United States, Canada, Australia, and New Zealand. Argentina and South Africa shared some features with this group. Capitalism in regions of recent settlement was less a transformation of existing economic structures than an elimination of native populations and transfer of capital, labor, and institutions from Europe to work land that was abundantly available within these regions.

However, capitalism was not simply imported and imposed as a preexisting system. Scholars have debated whether farmers in New England and the Middle Atlantic region in the seventeenth to nineteenth centuries welcomed or resisted the spread of markets and the extent to which accumulation of wealth motivated their actions. In their ownership of land and dependence on family labor they clearly differed from capitalist farms in England whose proprietors rented land and hired wage labor. Holding the independence of the farm household as a primary goal, these U.S. farmers also were determined to avoid recreating a European feudal social structure in which large landowners held disproportionate economic and political power.

A final group of late industrializers—Japan from the late nineteenth century and, after World War II, Korea, Taiwan, Brazil, India, Turkey, and possibly Mexico—took a path to capitalism based on what Amsden called "industrialization through learning." Like European late-comers such as Germany, Italy, and Russia, these countries took advantage of their relatively backward status. Generally, they borrowed technology rather than inventing or innovating, although Germany did innovate and Japan became capable of innovation in some areas.

Some late industrializers relied heavily on exports and benefited from participation in the international economy. But home markets were also important, and among the most successful Asian countries were those with land reforms and relatively equal income distributions. In this respect they resembled regions of recent settlement that were not dominated by concentrated landownership. For countries in the periphery, moreover, industrial capitalism could be fostered by delinking from the international economy. Some Latin American countries and Egypt saw their manufacturing sectors strengthen when the crises of the 1920s–1930s weakened their ties with the center. Delinking allowed them to follow more expansionary monetary and fiscal policies during the Great Depression than did the United States.

Capitalist and Noncapitalist Forms of Organization

The development of capitalism and free wage labor was intimately bound up with unfree labor forms and political subordination. Coexistence of capitalist forms with noncapitalist forms has continued into the twentieth century. Immanuel Wallerstein argued that during 1450–1640, a capitalist world-economy emerged that included very different labor forms: free labor (including yeoman farmers) in the core, slavery and coerced cash-crop labor in the periphery, and sharecropping in the semiperiphery. From the sixteenth to the nineteenth centuries, the Baltic grain trade provided food for western European cities while intensifying serfdom in eastern Europe. Eighteenth-century sugar plantations in the Caribbean using African slaves bought manufactured exports from Britain and food from the New England and Middle Atlantic colonies, which also then could import British manufactures.

In the United States, slavery, sharecropping, and petty production were noncapitalist forms that interacted with capitalist forms. Petty production is small-scale production that can be market-oriented but is not capitalist. It relies primarily on individual or family labor rather than wage labor, and producers own their means of production. Slavery, sharecropping, and petty production were especially important in agriculture, although some slaves were used in industry and the factory system did not universally eliminate artisan producers in manufacturing. In some sectors, specialty production by petty producers in industrial districts coexisted with mass production of more standardized products. Slaves and, after the Civil War, sharecroppers in the U.S. South produced the cotton that helped make textiles a leading industrial sector in both Britain and the United States. Slave owners purchased manufactured products produced by northern firms. Capitalist production and free wage labor thus depended on noncapitalist production for a key input and for some of its markets.

Petty producers in U.S. agriculture participated in markets and accumulated wealth, but unlike capitalist firms, accumulation was not their primary motivation. According to Daniel Vickers, U.S. farm families from initial settlement to the beginnings of industrialization held an ideal of "competency"—a degree of comfortable independence. They did not seek self-sufficiency, although they engaged in considerable production for their own use. They sold some of their produce in markets and could be quite interested in dealing for profit but sought to avoid the dependence on the market implied by a lifetime of wage labor.

As David Weiman explained, over the life cycle of a successful farm family more family labor became available and farm capital increased, allowing the household to increase its income and purchase more manufactured commodities. Farm households existed within rural communities that had a mix of private and communal social relations, some of which tended to limit market production and private accumulation of wealth. But over time the activities of petty producers contributed to a process of primitive accumulation—accumulation based on pre-or noncapitalist social relations, in which capital does not yet create the conditions for its own reproduction—which ultimately undermined the system of petty production in rural communities.

Noncapitalist forms of organization also include household production by nonfarm families and production by the state. These spheres have been variously conceived as supporting capitalism (for example, by rearing and educating the labor force), financially draining and undermining capitalism (in the case of the state), or providing an alternative to capitalism. Household production shrank over the nineteenth and twentieth centuries as goods and services formerly provided within households were supplied by capitalist firms. Production by the state expanded with defense spending, the rise of the welfare state, and nationalization in Western Europe and Latin America. Some of these trends contributed to the shift from manufacturing to services that was an important feature of capitalist economies in the twentieth century.

In addition to depending on noncapitalist economic forms, capitalism involved political subordination both domestically and internationally. In some countries, labor unions were suppressed. Political subordination of India within the British Empire was central to the smooth operation of the multilateral trade and payments network underlying the "golden age" of world capitalism that lasted from the last third of the nineteenth century to the outbreak of World War I in 1914. India's purchases of cheap manufactures and invisibles such as government services led to a trade deficit with Britain. Its trade surplus with India gave Britain the means to buy from other European countries such as Germany and France, stimulating their industrialization. On the monetary side, control of India's official financial reserves gave Britain added flexibility in its role as the world's financial center.

Uneven Capitalist Development

Both on a world scale and within individual countries, capitalist development is uneven: spatially, temporally, and socially. Some countries grew rapidly while others remained poor. Industrial leadership shifted from Britain to Germany and the United States at the end of the nineteenth century; they in turn faced New challengers in the twentieth. Within countries, industrial regions boomed, then often declined as growth areas sprang up elsewhere.

The textile industry in New England saw widespread plant closings beginning in the 1920s, and employment plummeted between 1947 and 1957. Production grew in southeastern states and was an important source of growth in the 1960s–1970s. But in the 1980s, textile production began shifting to even lower-cost locations overseas. Deindustrialization in the Midwest became a national political issue in the 1970s, as firms in the steel, automobile, and other manufacturing industries experienced competition from late industrializers and other U.S. regions. Growth in Sun Belt states was due to new industries and services as well as the relocation of existing industries.

Similarly, capitalism has been punctuated over time by financial crashes and by depressions with large drops in real output and employment. Epochs of growth and relative stability alternated with periods of stagnation and disorder. U.S. capitalism saw panics in 1819, 1837, 1857, 1873, 1907, and other years; particularly severe depressions occurred in the 1870s, 1890s, and 1930s. The post–World War II boom unraveled after 1973. Productivity growth was less rapid, and growth in median family income slowed markedly. Within periods of depression or prosperity, the experience of different industries is highly uneven. As Michael Bernstein emphasized, even during the 1930s the U.S. petroleum and tobacco industries saw strong output growth, while the iron and steel, automobile, and rubber industries remained depressed.

Finally, capitalism has been associated with shifts in the position of social classes, and its effects on different groups of people have been enormously varied. The broad-brush picture for Europe includes the decline of a landed aristocracy whose wealth and status were land-based and inherited; the rise of a bourgeoisie or middle class of merchants, manufacturers, and professionals with earnings from trade and industry; and the creation of a working class of wage earners. The fate of the peasantry varied—it was eliminated in some countries (England) but persisted in others (France, Russia), with lasting implications for economic and political development.

This simple story requires qualification even for Britain, where scholars question whether the industrial bourgeoisie ever truly dominated and suggest that landed interests maintained their political presence in the late nineteenth and early twentieth centuries by allying with internationally oriented financial capital. In the United States and other regions of recent settlement, the class configuration included the sector of family farmers discussed above. One result was that debtor-creditor relationships were particularly important in generating social conflict and social movements in the United States.

Although one might expect the capital-labor relationship to be the main locus of conflict in capitalist economies, this was not always the case. The United States did have a long and at many times violent history of capital-labor conflict. Its labor movement succeeded in the twentieth century in achieving considerable material gains for unionized workers; it did not seriously limit capital's control over the production process. Although groups such as the Wobblies (Industrial Workers of the World) sought to overthrow capitalism in the years prior to World War I, the United States did not have a strong socialist movement that included labor, as did some European countries. Other groups, particularly farmers, were important in the United States in alliance with labor or on their own in opposing what they saw as negative effects of financial capital or monopoly.

Farmers typically incur debts to purchase inputs, machinery, or land. During times of deflation or economic downturn those debts become particularly difficult to service. In addition to opposing debt and tax collection and foreclosures, farmers supported monetary policies that would increase the amount of currency and generate inflation (which would erode the real value of their debts) rather than deflation. Armed resistance to debt collection occurred in 1786–1787 in Massachusetts (Shays's Rebellion) and other states. After the Civil War, a long period of deflation lasting until about 1896 led farmers to join farmers' alliances and the Populist Party, which united with silver producers and greenbackers in calling for increases in the money supply. Although there were some concessions to these forces, the defeat of William Jennings Bryan by William McKinley in the presidential election of 1896 signaled the triumph of "sound money" advocates.

The Populists, like other third-party movements in the United States, did not succeed in becoming a governing party, but they were an important source of agitation, education, and New ideas. Many Populist proposals eventually became law, including railroad regulation, the income tax, an expanded currency and credit structure, postal savings banks, and political reforms. While some criticize Populist efforts to redistribute income and wealth, others celebrate the alternative vision of a more democratic capitalism that these farmers and laborers sought to realize.


Capitalism has had a two-sided character from its inception. Free wage labor coincided with unfreedom. Although capitalism eventually delivered greatly improved standards of living, its impact on people's lives as producers rather than consumers often was less positive. Jobs were deskilled, working conditions could be dangerous, and independence and decision-making were transferred to the employer. With changes in technology and industrial location, new workers were drawn in but old workers were permanently displaced. Rapid economic growth produced harmful environmental effects. Large-scale firms contributed to rising productivity but created potentially dangerous concentrations of economic and political power. Evolution of banking and financial institutions both aided growth and added a source of potential instability to the economic system.

Eliminating negative features of capitalism while preserving positive ones is not a simple or straightforward matter. As Robert Heilbroner observed, a medical metaphor is inappropriate. It is not possible to "cure" capitalism of its diseases and restore it to full health. Moreover, measures that eliminate one problem can help produce the next. For example, if government spending and transfers provide a "floor" to soften depressions, inflationary tendencies can result. But a historical perspective helps underscore the fact that capitalism is not an immutable system; it has changed in the past and can continue to do so in the future.


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———. "American Agriculture and the Labor Market: What Happened to Proletarianization?" Agricultural History 62, no. 3 (1988): 182–209.

Carol E.Heim

See alsoAmerican System ; Banking ; Financial Panics ; Industrial Revolution ; Industrial Workers of the World ; Labor ; Populism ; Right-to-Work Laws ; Trade Unions ; Welfare Capitalism .



CAPITALISM. Europe went through remarkable economic transformations between 1500 and 1800, including agricultural change, urbanization, industrial development, commercial expansion, and growing financial sophistication. Capital was accumulated and productively invested; it helped to create (and became increasingly essential to) the new forms of social organization used to exploit economic opportunities. Labor became more of a commodity to be bought and sold. Occupational diversification proceeded alongside a growing polarization of wealth, creating a large group of wage-dependent laborers and an emerging, but increasingly assertive, middle class that embraced the productive ideal.

These changes were once thought to be associated with a fundamental transition from one type of economic, social, and political form (feudalism) to another (capitalism). However, economic change in early modern Europe is better conceived as a changing balance between sectors and regions, some of which moved rapidly, others only slowly. Overlapping (if sometimes contradictory) forces helped Europe to become more capitalist over time, but noncapitalist forms existed alongside this trend and shaped the path it took.

Different degrees of capitalism coexisted in constantly changing alignments from the Middle Ages to the nineteenth century, and all regions of Europe had some dynamism at some periods. The richest "core" parts of Europe in 1500 were the lands ruled by the Habsburgs in Spain, northern Italy, southern Germany, and the Low Countries. Northern Europe was, by comparison, economically peripheral. By 1650 the economic hub of Europe had shifted irrevocably to the northwest seaboard, leaving the Mediterranean as the "periphery."


At the end of the Middle Ages, Europe's largely subsistence economies were small, fragmented, and lacking dynamism. Demand was slack, and what trade existed was in foodstuffs and a few luxuries. Goods needed an expanding market, which extralocal commerce seemed to provide by short-circuiting some of the inherent constraints on economic growth. Thus began greater intra-European trade and, crucially, the voyages of discovery, whichfor better or worsebrought Europeans into direct contact with the wider world. Supplies of new goods were brought to Europe, and new demands were created: for commodities like sugar, tea, and tobacco, and for semidurables like crockery or cotton and silk clothes. European manufactures found new markets abroad.

It was once thought that the profits so earned were concentrated in the hands of capitalists, who helped to fund further economic development. Direct and indirect benefits accrued. Production for exchange rather than use became the norm, and with it a specialization of function, or "division of labor." Successful merchants could diversify into industry. Transportation and transaction costs would be reduced by innovations in carrying. Ships had to be built, outfitted, and victualed, further stimulating production and technological innovation. Long-term credit, changes in the law on multiple ownership, which made possible "joint-stock companies," and increasingly sophisticated exchange facilities (including banknotes) fostered the rational and systematic maximization of net returns, which is a keynote of capitalism.

Historians conventionally believed that international trade, especially with the New World, was the prime force behind the primitive accumulation of capital, leading eventually to the industrial and commercial revolutions of the nineteenth century. Certain significant mercantile groups in the towns of northwest Europe benefited, but the overall stimulus to early capitalism should not be exaggerated. Overseas commerce was a risky business involving no more than one percent of European production. Dynamic and glamorous as international trade may seem, more mundane aspects of early modern economic life need to be considered. In order of numbers employed, commerce came a long way behind agriculture and industry. Once thought less dynamic than trade, the agricultural world in particular had considerable potential for economic change because of the nature of social class relations in some areas of rural Europe.


Social status and wealth in rural Europe were determined by the legal rights people had to the land they worked and consequently by their share of the surplus they extracted. Some parts of Europe had many peasant proprietors, but mostly the land was owned by a few rich people and worked by "tenant" farmers and landless or land-poor laborers. In France the political needs of the late-medieval French crown led it to foster peasant proprietorship. This created a substantial body of semi-independent peasantry, but they were generally poor, and the rural economy was relatively immobile. Scandinavia was similar. In contrast, the English peasantry was politically weaker, and independent freeholders were gradually turned into tenant farmers. This facilitated subsequent social change (expropriation) and economic improvements (based ultimately on consolidation of holdings) required for capitalism. Ownership of the means of production became concentrated in fewer hands, landholding units became larger, and specialized techniques were introduced to raise yields. Thus, fluid social relations of production were adapted to capitalism, and other, increasingly capitalistic, means of raising net profitability were introduced.

This is true of parts of northwest Europe, notably England. Yet a simple imbalance of power relationships in favor of the owners of the means of production did not necessarily promote capitalist development. Powerful landowners east of the River Elbe reacted to growing western demands for grain during the sixteenth-century population expansion by exploiting more intensively their feudal privileges over serf labor. For example, the rights of Russian lords over their peasants were consolidated and extended by comprehensive laws passed in 1649. Serfdom in the east was characterized by restricted personal freedom and the exploitation of the peasantry by legal and political rather than purely economic means. Labor power had not been turned into a simple commodity for, in addition, the relation between capital and labor retained a personal dimension, and workers had means of support other than selling their labor. The experience of eastern Europe is a reminder that a commercialized economy is not the same as a capitalist economy. It also shows that economic change did not always bring with it more capitalistic forms of social organization and that a polarized society is not necessarily a capitalist one.


Commercial explanations of capitalist development, which focus on extrinsic forces, may underestimate the internal dynamism of European agriculture, industry, and towns. Some regions of Europe had been net importers of food and exporters of finished products since the Middle Ages. The economically dynamic northern Italian city-states are an example in the late Middle Ages. During the sixteenth century, the Dutch imported as much as a third of their grain needs from the Baltic, allowing specialization within pastoral agriculture alongside a level of urbanization and industrial employment that would have been unthinkable if their economy had been closed.

Just as some regions depended on trade, so too did most European families. Far from being merely self-sufficient, production for exchange was common. It is unlikely that most households made items such as clothes for their own use, because the manufacturing process from raw material to finished garment was far too complicated and time-consuming. Even in the more isolated economies there was a considerable degree of specialization and therefore exchange. Incomes fluctuated, but in good times there were surpluses to spend on marketplace purchases. Thus, there were opportunities for growth and change even within "traditional" economies.

Factories and capitalism are conventionally linked, but most early modern industrial production was located in the home and in the countryside: it is commonly known as "cottage industry." Across northwest Europe between a sixth and a third of all men living in the countryside were primarily employed in nonagricultural jobs such as textile manufacture. These rural domestic producers were both independent artisans producing for local markets and dependent employees whose work might reach extralocal markets. The latter form is known as "putting-out," and its advantage to capitalists was that it was cheap and flexible. Breaking free of guild restrictions on quality, price, and employment, urban merchant entrepreneurs were able to find plenty of eager workers among the underemployed poor of rural Europe. In the major cloth-producing areas such as Picardy in northeast France or the English West Country, these entrepreneurs bought raw wool or flax to be prepared and spun into yarn. They then gave the yarn to specialist weavers and bought back the cloth, which was taken for finishing and finally for selling, often in national or international markets. Urban specialists added more value to the product by dyeing cloth and tailoring it, but the majority of ordinary woolen and linen fabric was made in the countryside.

Putting-out thus embodied important capitalistic elements. Capital was controlled not by individual workers, but by entrepreneurs; the production process involved a clear division of labor; workers were paid wages, for, while some might own their own looms, the only commodity they were selling was their labor; and goods were sold in nonlocal markets. Capitalism is ultimately defined, as Karl Marx (18181883) argued, not by the performance of an economy, but by its specific relations of production between capital and labor. However, small-scale production organized by master weavers rather than merchants continued to characterize the woolen-cloth industry of the seventeenth-century Low Countries. Even within a single English county like Yorkshire, putting-out and independent artisan cloth production coexisted. And rather than a linear progression from independence to dependence, workers sometimes moved back and forth between them.


It is understandable that historians searching for early modern capitalism focused on agrarian change and on the agricultural origins of industry. Most Europeans lived on the land and it provided not only their subsistence, but also most of the raw materials for industry (wood, leather, and fibers for making cloth); apart from wind and water, energy came mainly from organic rather than mineral sources. Some 8 percent of all Europeans lived in towns of 10,000 or more in 1600 and 10 percent in 1800. Most of this growth can be accounted for by a trebling in England's proportion from under 6 percent to over 20 percent. London alone grew from 200,000 inhabitants to nearly 600,000 during the seventeenth century and to one million by 1800. As early as 1700 nearly a third of the Dutch lived in towns, but there and elsewhere in continental Europe the percentage did not grow any further. In eastern Europe the urban component remained minimalas little as 3 percent in 1800.

Despite their often small size and low proportion of national population, towns were the motors of economic change. They functioned as centers of production (especially finishing and luxury goods), transportation and exchange; they provided legal, financial, and educational services; they served as bases for secular and ecclesiastical bureaucracies; they acted as communications nodes, providing verbal, written, and printed information; they offered increasingly sophisticated leisure facilities. Their impact was felt in all economic sectors. While productivity in French agriculture was generally low, the area around Paris had yields comparable with England; Dutch farming was highly advanced because of the large urban markets.

Towns and capitalism were not always connected. Towns helped to modernize the economies of northwestern Europe, but they had little effect on Russian agriculture, trade, and industry because they were simply military or administrative outposts in a sea of feudalism. Southern Italy had many towns, but they were essentially dormitories for farmers and did not offer the range of industrial, commercial, and service occupations found elsewhere in Europe. Some have even questioned whether the urban elites of seventeenth- and eighteenth-century France were "bourgeois" in any meaningful sense. Most aspired to belong to the nobility and, when able, tried to ape their social norms and economic behaviorincluding a disdain for trade and a preference for conspicuous consumption. Yet throughout the period there was a strong association between urbanization and the development of different stages of capitalismin northern Italy, then the Netherlands, then England.


Towns were hothouses of capitalist development, but other factors also nourished the acquisitive and productive ideal. From the mid-sixteenth century Calvinism appealed to those who believed that wealth was a sign of God's favor and that glorifying God could be done through acquisition. Yet some Calvinists believed it was wrong to exploit other people, and different faiths have also been credited with fostering capitalism: for example, Jews had traditionally been untroubled by Christian reservations about charging interest. Nor was Catholicism an enemy of financial sophistication, for north Italian bankers dominated the commercial and public finances of the fifteenth-century Mediterranean world. Literacy and numeracy had also been high in this region, especially in the cities, during the Renaissance, but it was in the northwest of Europe that literacy developed most rapidly and extensively in the seventeenth and eighteenth centuries.

In the eighteenth century secular intelligentsia took up the banner of capitalism. Enlightenment thinkers analyzed, celebrated, and promoted getting and spending, arguing that commercial inter-course was one way of promoting the social interaction that was the basis of personal and societal improvement. Changes in attitude not only affected the owners of capital. An "industrious revolution," marked by a growing propensity to work in order to consume, fueled the demand side of growth. For many people, incomes and consumption rose. Marx thought that workers would labor more just to stand still, but the capitalism that developed in early modern Europe was fed by a desire not for subsistence, but for betterment, not for "needs," but for "wants." The consolidation and glorification of private property that occurred in the West was an important precondition of an "industrious revolution." In eastern Europe, by contrast, the idea of individual ownership of goods was subordinated to that of family or community interest.

While Enlightenment writers eventually functioned as the ideologues of nineteenth-century laissez-faire capitalism, they did not come from such an environment. A body of laws and assumptions about economic regulation, which were designed to promote social stability over individual gain, restricted the free market. At best, attitudes toward capitalism remained ambivalent. It was "virtuous" to engage in commerce, but only if market relations were equalized, competition was fair, and exchange therefore equitable. Throughout the early modern period, capitalism remained a contested terrain. Just as Calvinism had provided only contingent support for capitalism in the seventeenth century, Enlightenment thinkers saw property and gain entailing moral and civil obligationsboth against a backdrop of enduring political support for intervention in support of a "moral economy."

The increasingly centralized territorial states might facilitate, protect, and exploit economic expansion and consolidation, but when there were competing interests, political priorities almost invariably outweighed capitalist ones. Countries like Spain ruined themselves on imperial commitments, although warfare did help indirectly to promote certain aspects of the development of capitalism. Nor were economic and political advantage the only policy considerations. Alongside sometimes rampant economic individualism there existed a greater or lesser commitment to social collectivism. Government policy recognized and encouraged capitalism, but it also tried so to structure its development as to limit its most destructive effects. For its victims there were poor-relief schemes revised and augmented from their medieval origins to cope with the many new vulnerabilities that capitalism brought.


Growth, decline, and stagnation coexisted in different sectors and regions of early modern Europe. The preconditions of and paths to progress differed, but the regions that did foster capitalism had shared characteristics. High levels of literacy and urbanization, sophisticated judicial systems, dense and long-established networks for exchanging goods and people, and technological advances unified the North Sea region and enabled it to progress at a faster rate. At the other end of the spectrum were southern and eastern Europe, where high production costs, inadequate transportation, extreme polarization of wealth, illiteracy, a small and undynamic urban sector, and heavy-handed political intervention inhibited economic change.

Change could also have very different implications. Involvement in European or world commerce was a social solvent in England and the Netherlands but involved a hardening of traditional relationships east of the Elbe. At every turn, existing social forms, cultural priorities, and political structures influenced the extent of economic change. Its effects were also contingent. Domestic arrangements and the cultural preferences that underlay them shaped the course of economic development at least as much as capitalism affected the family.

Incomplete as it was even in 1800, the development of a capitalist economy had progressedalbeit hesitantlyespecially in and around the North Sea Basin. A proletariat, a class that had no means of subsistence other than wages, was emerging in town and country. From being a conglomeration of parceled regional economies, continent-wide exchanges of grain and of certain raw materials and manufactures helped to create a more unified entity. A rudimentary "world economy" was being founded. New products and new markets were outdating the mercantilist assumption of a "fixed cake." Ideas of intervention and stasis were being replaced by laissez-faire and dynamic growth as the balance of attitudes shifted in favor of capitalism. Capital was being accumulated and used in an increasingly sophisticated and productive way. Technological change had not yet broken down the barriers within traditional economies, making possible the exponential growth of the nineteenth and twentieth centuries, but labor productivity was rising. A fully capitalist European economy was in the making.

See also Agriculture ; Banking and Credit ; Commerce and Markets ; Communication and Transportation ; Economic Crises ; Enlightenment ; Feudalism ; Industrial Revolution ; Industry ; Inflation ; Laborers ; Liberalism, Economic ; Money and Coinage ; Proto-Industry ; Serfdom ; Shipping ; Stock Exchanges ; Textile Industry .


Aston, Trevor H., and C. H. E. Philpin, eds. The Brenner Debate: Agrarian Class Structure and Economic Development in Pre-Industrial Europe. Cambridge, U.K., and New York, 1985.

Braudel, Fernand. Civilization and Capitalism, 15th18th Century. Translated by Siân Reynolds. 3 vols. London, 19811984.

De Vries, Jan. The Economy of Europe in an Age of Crisis, 16001750. Cambridge, U.K., 1976.

Duplessis, Robert S. Transitions to Capitalism in Early Modern Europe. New York, 1997.

Kriedte, Peter, Hans Medick, and Jürgen Schlumbohm. Industrialization before Industrialization: Rural Industry in the Genesis of Capitalism. Translated by Beate Schemp. Cambridge, U.K., 1981.

Macfarlane, Alan. The Origins of English Individualism: The Family, Property, and Social Transition. Oxford, 1978.

Prak, Maarten, ed. Early Modern Capitalism: Economic and Social Change in Europe, 14001800. New York, 2001.

Tilly, Charles. Coercion, Capital, and European States, A . D . 9901990. Oxford, 1990.

Wallerstein, Immanuel. The Modern World-System. 3 vols. New York, 1974, 1980, 1989.

Wrightson, Keith. Earthly Necessities: Economic Lives in Early Modern Britain. New Haven, 2000.

R. A. Houston







Capitalism, first used as a term by Werner Sombart around the beginning of the twentieth century, is a social system dominated by economic relations, particularly market relations. The institution of private property is elaborately developed and well secured, and property owners derive income from the sale of output made with labor hired for wages or salaries. The income of property owners can appear as profit, interest, or rent, depending mainly on the kind of property involved. Workers have little or no income-earning assets other than their capacity to labor, which they contract to sell to property owners (capitalists) for a definite period of time but not for a definite intensity. Property income may be increased by getting workers to increase the intensity of labor, that is, to work harder, faster, or smarter.

Although markets existed in a great variety of social systems, appearing back to the furthest extent of recorded history, capitalism is unique in the degree to which market relations affect every aspect of the social order. According to Karl Polanyi in The Great Transformation (1944), the rise of capitalism represents a major institutional reversal. Precapitalist societies often provided for markets within an elaborately structured cultural framework, in which social status and social roles were already established, such that markets played a decidedly subordinate role. Trade and traders had their place, often clearly delimited in time, space, and permitted function. Under capitalism, in contrast, the market itself increasingly provides the framework for the determination of social status and social roles; market relations increasingly determine the time, space, and function of every other aspect of the culture. Cultures are modified and subordinated to global markets, creating a world system beyond any single cultures design.


Specifically the rise of capitalism involves legal developments allowing for efficient markets for land and other natural resources. The sovereign rights of the state and the blood rights of family, clan, and tribewhatever these may includebecome limited and clearly distinguished from modern property rights, so that real estate and rental markets as well as more esoteric markets in mineral rights may thrive unencumbered by ambiguities and restrictions of tradition.

Similarly efficient labor markets are developed to accommodate wage labor on a massive scale that transcends or escapes human relationships based on tradition, intimate acquaintance, or direct coercion. In practically all precapitalist societies, there are some kinds of subsistence activityperhaps in hunting, gathering, farming, fishing, or herdingto which almost anyone could turn for a living in default of any more exalted assignment or organized function. In developed capitalist societies, there is no default living. Access to requisite land or natural resources is not free and not otherwise institutionally guaranteed. Significant property ownership is neither universal nor necessarily even widespread in the population. In fact in the long actual history of the establishment of legal private property in its modern form in many countries, the bulk of property, through force and fraud, came into the hands of old elites and entrepreneurial upstarts, leaving most people without property and without legal access to resources or means of production. Hence involvement in market relations and in social networks becomes inevitable, and that presents a distinct set of challenges to the propertyless, more or less forcing many of them into the labor market and into a weak bargaining stance vis-à-vis the owners of property rights in the means of production.

An essential insight in Karl Marxs Capital (1867) is that the captive excess supply of labor, or in Marxs vivid terms the reserve army of labor, creates a competitive environment in which workers can be expected to be compliant and wages are negotiated down to subsistence level. Specifically wages are not expected to bear any particular relation to the value of goods produced and sold by the employer-owners, and that provides a nonfleeting source of profitability. Thus Marx demonstrated that regular profit can come from property ownership in the means of production, even if those means of production are themselves produced entirely by workers.

Naturally the state of the capitalist labor market presents some glorious opportunities to employers, but it also presents challenges. Mere biological subsistence turns out to be quite distinct from maintenance of healthy, reliable, motivated, and skilled employees. To the extent that employers scan their labor supply for quality as well as quantity, they seek a labor market different in structure from that envisioned by classical and Marxist economists. As the experience of industrialists from Robert Owen in the 1820s to Henry Ford in the early 1900s repeatedly illustrated, it can be profitable under certain circumstances to invest more in the labor force, paying workers more than is customary or appears necessary in terms of current labor market conditions. This insight gave rise to the concept of human capital, according to which investment in workers can yield a return as readily as might investment in any other kind of productive equipment; to human resource management, including elaborate segmentation and structuring of the labor market; and finally to a variety of state-sponsored programs socializing the cost and standardizing the practice of basic education, sanitation, health care, and other basic investments in the population thought to improve the overall efficiency and productivity of labor. In short, actual labor markets fail to correspond to the classical vision to the extent that labor power cannot be merely reproduced in families outside the market, as in the Marxist model, but requires capitalist or socialized investment for its construction and maintenance.

Another challenge facing employers is to manage workers and the work environment so that the potential for profit is actually realized. Employees rarely work at peak productivity on their own initiative based on their own organizational efforts, so investment in human capital does not in itself suffice to maximize productivity and profits. Hence the need for management to organize and supervise on behalf of the enterprise owners, and hence the constant struggle at the work site between management and labor.


Unlike in precapitalist cultures, the organizing principles of capitalism are abstract and general. Law is highly formal, aspiring to universal reach, and markets involve stereotyped interactions among anonymous participants. It is no coincidence that capitalist processes are often comprehensible as games, as witnessed by the elaboration of game theory and its rapid extension beyond political science to economics and sociology. This creates an environment uniquely amenable to entrepreneurship.

Of course entrepreneurship even as currently understood is omnipresent in all social orders. History is full of accounts of military adventurers, poseurs, prophets, travelers, and merchants who preceded the arrival of the modern capitalist epoch. Presumably no society could be so structured, so rigid and predetermined, existing under circumstances so regular and predictable, as to provide no space for the restless and adventurous to innovate through that recognizable yet undeterminable combination of design and accident. Yet modern capitalist society was the first to recognize entrepreneurship as a regular rather than extraordinary function in a wide variety of fields of endeavor. It is even encouraged.

Two aspects of entrepreneurship deserve particular attention for purposes of understanding capitalism. The first is risk taking; the second is innovation. A certain amount of risk taking is encouraged under capitalism simply through the institution of property. Legally welldefined property rights allow an unprecedented expansion of the credit system by allowing enormous amounts of value to be put at its disposal in the form of collateral without the items constituting that collateral having been withdrawn from current productive use.

Even more space for purposeful investment in potentially risky ventures is provided by the modern corporate structure of business firms responsible for the large majority of the value of goods and services produced each year. This structure has evolved to spread and limit risk and thus to encourage voluntary contributions of funds. The spreading of risk is accomplished by selling shares, each of which is typically a miniscule fraction of the firms total outstanding value and often fairly liquidmeaning that it can often be quickly sold if the need for cash arises. Limitation of risk is accomplished by the legal device of limited liability. The maximum an investor can lose, unlike in a sole proprietorship or normal partnership, and the maximum an investor can be held legally liable for by virtue of that kind of participation is the total value of shares he or she holds. By allowing small, limited bets on the future, the corporation encourages risk taking and provides resources for entrepreneurship.

In most societies innovationanything new that disrupts or undermines traditional ways of doing thingsis vigorously rejected, and that rejection is overcome only by enormous endurance and determination or by forcible imposition. Under capitalism, this resistance is diminished. Property is protected, but its market value is not guaranteed. According to Joseph Schumpeter in Theory of Economic Development (1911) and Business Cycles (1939), economic growth comes in waves of innovations, often revolving around some central innovation, such as alternating current, the internal combustion engine, or the microchip. The initial innovation may be accompanied by a flurry of activity amid limitless hopes and give rise to a boom, but then follows disappointment and more importantly the destruction (creative destructionanother term first used by Sombart) of value in now obsolete goods, equipment, technologies, and skills; this tends to lead to depression. Eventually the further spread of economic activity based on the innovation helps lead to a recovery, but these innovation-led developments would perhaps never occur were the way not first cleared during the depression by creative destruction.


Economists have come to view capitalism in three major ways. The classical and neoclassical schools emphasize the spread of market relations and describe efficiency gains expected as a consequence. Marxist and related schools (e.g., that inspired by Henry Georges 1879 Progress and Poverty ) focus on power relations and class structures implied by the prevailing system of property rights and emphasize how those hamper the achievement of many of the goals typically viewed as part of social progress, such as greater equality, more democracy, and more security. The Austrian school, including Schumpeter, deemphasizes efficiency and instead promotes the innovative potential of decentralized knowledge and action. Though property rights are formally protected, the value of actual property is freely created and destroyed in the course of progress.

SEE ALSO Competition; Development Economics; Laissez Faire; Markets; Marx, Karl; Mode of Production; Primitive Accumulation; Profits; Rate of Profit


George, Henry. [1879] 1912. Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy. Garden City, NY: Doubleday.

Marx, Karl. [1867] 1992. Capital: A Critique of Political Economy. Trans. Ben Fowkes. New York: Penguin.

Polanyi, Karl. [1944] 1957. The Great Transformation: The Political and Economic Origins of Our Time. Boston: Beacon.

Schumpeter, Joseph. [1911] 1949. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA: Harvard University Press.

Schumpeter, Joseph. 1939. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill.

Schumpeter, Joseph. [1942] 2005. Capitalism, Socialism, and Democracy. London: Taylor and Francis.

Sombart, Werner. [1916] 1987. Der moderne Kapitalismus. Historisch-systematische Darstellung des gesamteuropäischen Wirtschaftslebens von seinen Anfängen bis zur Gegenwart. Munich: DTV.

Michael J. Brun


capitalism A system of wage-labour and commodity production for sale, exchange, and profit, rather than for the immediate need of the producers. Plentiful examples of capitalism in the pre-modern era exist but, typically, capitalist exchanges were restrained by political and religious control. What has impressed students of modernity is the huge and largely unregulated dominance of capitalist enterprise (with its related monetary and market networks) across political and cultural frontiers. Capitalism provided the principal, but not the only means of industrialization, and should not be confused with it.

The list of defining attributes of capitalism still derives largely from the pioneering writings of Karl Marx and Max Weber. Marx took the production relations of capitalism as its most essential feature. Following Adam Smith he distinguished the intrinsic use of commodities from their exchange value in the market. Capital is created by purchasing commodities (raw material, machinery, labour) and combining them into a new commodity with an exchange value higher than the sum of the original purchase. This is made possible by the use of labour-power which, under capitalism, has itself become a commodity. According to Marx, labour-power is used exploitatively: its exchange value, as reflected in the wage, is less than the value it produces for the capitalist. The difference, so-called surplus value, is retained by the capitalist and added to the stock of capital. The cycle recurs ad infinitum and is the basis of class conflict. But Marx's identification of capitalism with exploitation relies on the thesis that labour is the source of all value—and therefore profit. This is contested in mainstream economics and even by many Marxists.

Weber also recognized the importance of wage labour but considered market exchange as the defining characteristic of capitalism. Thus, in the modern West, capitalism typically means calculating rationality, accumulation of wealth through deferred gratification, and the separation of economic and social relations. The other institutions necessary to capitalism include: private property, formally free labour, a network of markets for raw materials, labour produce, and an extensive monetary system. Weber's critics argue that, unlike Marx, he fails to specify the underlying mechanisms which weld these institutional features into a functioning whole.

The concept of capitalism now has little analytic value by itself because of the extremely wide expanse of historical time over which it might be applied. The insight to be gained from describing both mid-Victorian and late twentieth-century Britain as capitalist is limited. The same applies to its wide geographical and cultural scope, since it is not self-evidently helpful to explain the momentum of contemporary societies as different as Japan, Sweden, and Australia, simply in terms of their possession of a capitalist system of production. More precision can be gained by specifying types of capitalism according to either qualitative or quantitative factors.

The aim of qualitative classification is to show that capital can be accumulated by several different methods. Thus mercantile capitalism is a system of trading for profit, typically in commodities produced by non-capitalist production methods. Agrarian capitalism is exemplified by the activities of the British landowning gentry during the seventeenth and eighteenth centuries. The agrarian revolution they oversaw transformed a system of production for subsistence into the production of cash crops for the market, the surplus being made possible by reformed and mechanized cultivation. Industrial capitalism is capitalism's classic or stereotypical form. It entails manufacture by means of a factory system with an intricate division of labour within and between work processes; the creation of designated workplaces and factories; de-skilling of traditional handicraft skills; and the routinization of work tasks. Financial or pecuniary capitalism subordinates the capitalist productive process to the circulation of money and monetary assets and hence to the accumulation of money profits as such. It presupposes a highly developed banking system, an equity market, and corporate holdings of wealth through share ownership. As Thorstein Veblen pointed out, whole industrial complexes as well as buildings and land, become the subject of speculative profit and loss. State capitalism occurs where some element of government-created or government-led enterprise has been necessary to initiate both industrialism and capitalism. Even in nominally communist economies, or in the developing world, state enterprise finds itself beholden to the pressures of international trade and finance, or the managerial constraints of capitalist production methods.

Quantitative classification aims to reflect the extensive variation in the scale of capital accumulation and in the concentration of the economic power of capital. Petty accumulation is a network of individual producers or artisans, typically found at the outset of capitalist history, but far from uncommon in the modern (especially the developing) world. Formally, it means that the owner of capital is also the worker, and the system is nominally classless. Entrepreneurial capitalism exists when capital accumulation makes possible a division between owners and employees. The entrepreneurial business class typical of this phase consists, in theory, of individuals who wholly or substantially own and also control (manage) their undertakings. Corporate or monopoly capitalism is the outgrowth of shareholding, limited individual liability, and the concentration of capital into large impersonally owned monopolistic or oligopolistic holdings through banks and finance houses. It is identified with the growth of corporations and a division of labour, supposedly through shareholding, between owners and managers.

Despite the long history of capitalism, it is often claimed that commodity production and unregulated exchange are inimical to social order, most notoriously in Marx's (unfulfilled) prediction that the antagonistic class relations of capitalism would eventuate in its political overthrow through violent revolution. But conservative critics, too, have argued that the calculating behaviour encouraged by the capitalist marketplace would cause disorder through the devaluation of moral traditions. Despite these views, instability would seem not to be a defining characteristic of capitalist systems, and the reason would seem to lie in the specifics of the wide range of cultures in which nominally capitalist production relations have been embedded.

Tom Bottomore's Theories of Modern Capitalism (1985) is a good introductory overview of this vast topic. For a provocative and detailed analysis of the contemporary international financial scene see Susan Strange , Casino Capitalism (1986)
. Strange's observations suggest that many sociological models of capitalist exchanges may in fact be rather selective, referring mainly to entrepreneurial or corporate industrial capitalism, and ignoring the vast speculative activity associated with modern money and commodity markets. See also ENTREPRENEUR; LABOUR THEORY OF VALUE.


capitalism. Since Marx's great work, Das Kapital, this term has acquired pejorative overtones indicating criticism rather than approval or even neutral exposition. Capitalism is the name given to the market economy system, which had its roots in earliest history in exchange between communities, but which did not come to full fruition until the restrictive practices of the medieval and mercantilist eras had been gradually eroded. The upsurge in international and intercontinental trade, especially from the 18th cent. onwards, together with the beginnings of modern economic growth in western Europe and North America, was rooted in the operation of competitive markets. During the past two centuries world economic growth has been achieved very largely through the free market system and mainstream economic theory has provided a theoretical justification for it. But it has also been subject to sustained criticism, both in the mild form that its inherent limitations required that its operation should be modified by government intervention and, at the extreme, that its inherent flaws and corruption would ensure its eventual collapse.

The positive case for free market capitalism is based on the liberty of individuals to pursue their objectives subject only to the constraint of law. The state should be involved principally, and some would say exclusively, in providing a legal framework within which property rights and contracts are upheld. Given such a constitutional framework, the most efficient economic system allows markets to operate freely, as individuals buy or sell commodities and services including their own labour. The competitive environment, idealized in perfect competition, represents the most efficient structure. In such a market, all parties are fully informed and are price takers, since no group or individual has sufficient power to control either prices or supplies. Such a structure implies that all participants benefit, so that the interaction of individuals within the market is mutually advantageous. Competition weeds out costly or inefficient producers and ensures that consumers pay the lowest possible price.

It is, of course, generally recognized that this is not an entirely accurate description of either the modern economy or its precursors. The theoretical tradition supporting the free market system has passed from classical economics to the neo-classical school, which is the current mainstream, and on the more radical right to monetarism, new classical, and Austrian economics. All offer a similar explanation for the divergence between the idealized system outlined above and the reality of human experience. This depends heavily on the concepts of market imperfection and market failure, which suggest that a range of obstacles inhibit the free working of markets. Monopoly power constitutes such an obstacle. Companies with such an advantage can restrict sales or charge high prices at the expense of consumers. The legislation passed in the late 19th cent. in the USA was spurred by the fear of the monopoly power accumulated in the hands of conglomerates like Standard Oil and broke up the trusts into smaller and competitive units. After 1979 the British government sought to break the monopoly of state industries in telephones, gas, and electricity by returning them to the private sector and exposing them to competition. Another type of perceived imperfection has been the interference of government policy. Monetarist theorists like Friedman have explained inflation as the result of weak control of the monetary system by the state. Even the Thatcher administration failed to live up to the strictures of Professor Friedman's policy prescription.

According to this perspective, the market system is totally satisfactory provided various imperfections can be eliminated. But one difficulty lies in the provision of public goods by the state because market failure means they are not adequately supplied by private producers. Examples include transport networks, law and order, welfare benefits, defence, health, and education. The difficulty lies in the fact that payment is indirect, through taxation, rather than in the direct way in which individuals buy themselves a coat or a book. An important market imperfection, as perceived by those on the right, lies in the oversupply of public goods by the vested interests of bureaucrats and politicians, while concealing the true cost to the taxpayer by financing provision through fiscal deficits.

More familiar criticisms have come from those whose vision of capitalism is not of an ideal state marred temporarily by imperfections. The Keynesian tradition, following the work of John Maynard Keynes, makes the basic assumption that the market system needs to be supplemented and managed by the state because it will seldom produce outcomes optimal for society as a whole. Adherents to this tradition believe, for example, that state intervention can reduce unemployment and generate economic growth, both of which claims would be denied by scholars like Friedman. A far more radical view of capitalism is taken by the Marxian tradition. Marx argued that capitalism was based not on complementarity of interest but upon conflict between the classes. Further, he argued, capitalism contained the seeds of its own destruction through that conflict. As capitalists cut wages to sustain profits in the face of ever more severe competition, they must reduce the capacity of workers to buy their products, leading to a crisis of underconsumption. The acquisition of colonies was one means of postponing eventual collapse by securing new and additional markets. An important 20th-cent. variant of the radical critique was dependency theory. This asserts that the industrialization of the western economies was funded by the expropriation of resources from the Third World, through cheap labour and imperialist control, a further potent manifestation of the inherent corruption within capitalist development. Others have explained the continued failure of the capitalist world to collapse, as predicted by Marx, as a result of artificial demand created by governments in the form of military expenditure. See also socialism.

Clive H. Lee


Backhouse, R. , A History of Modern Economic Analysis (Oxford, 1985);
Howard, M. C., and and King, J. E. , A History of Marxian Economics (2 vols., 1989, 1992);
Mair, D., and Miller, A. G. (eds.), A Modern Guide to Economic Thought (Aldershot, 1991).

Market Economy

Market Economy


A market economy is an economic system that allocates scarce resources based on the interaction of market forces of supply and demand. It is an economy that operates by voluntary exchange and is not planned or controlled by a central authority. A market economy, also called a free economy or free enterprise economy, is the conceptual opposite of a command economy, also known as a planned or government-controlled economy, where all goods and services are produced, priced, and distributed under government control. In the twenty-first century a market economy is most often associated with a capitalistic economy.

The market is a process in which individuals interact with one another in pursuit of their separate economic objectives. The basic principle under which the market functions is: If an individual has undisputed ownership of something and wishes to exchange it for another thing that is owned by someone else and the exchange is executed without violence, theft, or deception, then the individual becomes entitled to what the other person was previously entitled and vice-versa. Both parties to an economic transaction in the market benefit from it, provided the transaction is bilaterally voluntary and informed. In this way, through the market process everyone is able to escape coercion at the hands of any one buyer or seller by turning to another. The market prevents one person from interfering with another, allowing a high degree of autonomy. In addition, the society is able to reap the benefits from the division of labor and specialization and function.

The prices that emerge from voluntary transactions, which are motivated by separately self-interested individual behavior, generate a spontaneous order. Many economic theorists argue that these prices coordinate the activity of people in such a way as to make everyone better off. An individual who intends only his or her own gain (profit) by producing goods and services at the same time is satisfying the needs of other people for these goods and services. According to the Scottish economist Adam Smith, individuals pursuing their own self-interest are led as if by an invisible hand to behave in a socially desirable way by satisfying peoples needs for goods and services (1976).

The result of the operation of a competitive market, efficient scarcity prices, in the absence of market failure is indispensable to the operation of the market system. Scarcity prices perform three functions in organizing economic activity: first, they transmit information about the divergent preferences of the economic actors; second, they provide an incentive to adopt least cost methods of production; finally, they determine who gets how much of the product. Prices can perform these functions only if the market is able to function freely; that is, able to function without any discretionary intervention, which results in distorting prices producing the undesirable results of shortages, queues, and low quality, as occurred in the Soviet Union. Before the collapse of the government-controlled economy of the Soviet Union, prices were set by the government, not by the market, below equilibrium. As a result, enterprises did not have an incentive to satisfy consumer demand.

Market-based economies require at least limited government intervention, because a market requires appropriate laws and institutions including defined property rights that are respected and enforced and procedures for guaranteeing the execution of contracts. Markets are also characterized by market failure; that is, an allocation of resources that is not efficient. The market is not able to produce public goods (defense, law and order), it is not able to include the social cost or benefits of externalities (environmental pollution, education), and it creates monopolies and oligopolies. The state takes on the responsibility of producing public goods and subsidizing positive externalities funded through taxation, while restricting negative externalities, monopolies, and oligopolies.

SEE ALSO Market Clearinghouse; Markets


Friedman, Milton, and Rose Friedman. 1980. Free to Choose: A Personal Statement. New York: Harcourt Brace Jovanovich.

Smith, Adam. 1976. An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press.

Aristidis Bitzenis

John Marangos



Max Weber offered a value-free definition of modern capitalism: an economic system based on rational accounting for business, separate from the personal finances of an individual or family; a free market open to persons of any social status; the application of advanced technology, especially in large enterprises that required significant amounts of invested capital; a legal system providing equal treatment under the law, without arbitrary exceptions, and ensuring protection of the right of private property; a flexible labor market free of impediments to social mobility, such as slavery and serfdom, and of legal and institutional restrictions, such as minimum-wage laws and labor unions; and the public sale of shares to amass significant amounts of investment capital. Although no economy in world history has ever attained perfection in any of these six dimensions, social science can determine the extent to which economic institutions in a given geographical and historical situation approached this abstract "ideal type."

The institutions of modern capitalismcorporations, exchanges, and trade associationsevolved in Europe from the High Middle Ages (10001300) onward. Corporations eventually appeared in the Russian Empire in the reign of Peter I, and by the late nineteenth century the tsarist government had permitted the establishment of exchanges and trade associations. However, the vast size of the country, its location on the eastern periphery of Europe, the low level of urbanization, the persistence of serfdom until 1861, and the late introduction of railroads and steamship lines slowed the diffusion of capitalist institutions throughout the country.

The autocratic government, which had survived for centuries by wringing service obligations from every stratum of society, viewed capitalist enterprise with ambivalence. Although it recognized the military benefits of large-scale industrial activity and welcomed the new source of taxation represented by capitalist enterprise, it refused to establish legal norms, such as the protection of property rights and equality before the law, that would have legitimized the free play of market forces and encouraged long-term, rational calculation. As Finance Minister Yegor F. Kankrin wrote in March 1836: "It is better to reject ten companies that fall short of perfection than to allow one to bring harm to the public and the enterprise itself." Every emperor from Peter I onward regarded the principle of a state based on the rule of law (Rechtsstaat ; in Russian, pravovoye gosudarstvo ) as a fatal threat to autocratic power and to the integrity of the unity of the multinational Russian Empire.

The relatively weak development of capitalist institutions in Russia, their geographical concentration in the largest cities of the empire, and the prominence of foreigners and members of minority ethnic groups (Germans, Poles, Armenians, and Jews, in that order) in corporate enterprises led many tsarist bureaucrats, peasants, workers, and members of the intelligentsia to resent capitalism as an alien force. Accordingly, much of the anticapitalist rhetoric of radical parties in the Russian Revolutions of 1905 and 1917 reflected traditional Russian xenophobia as much as the socialist ideology.

See also: guilds; merchants; nationalism in the tsarist empire; russia company


Gatrell, Peter. (1994). Government, Industry, and Rearmament in Russia, 19001914: The Last Argument of Tsarism. New York: Cambridge University Press.

Owen, Thomas C. (1991). The Corporation under Russian Law, 18001917: A Study in Tsarist Economic Policy. New York: Cambridge University Press.

Roosa, Ruth A. (1997). Russian Industrialists in an Era of Revolution: The Association of Industry and Trade, 19061917, ed. Thomas C. Owen. Armonk, NY: M.E. Sharpe.

Weber, Max. (1927). General Economic History, tr. Frank H. Knight. New York: Greenberg.

Thomas C. Owen


capitalism, economic system based on private ownership of the means of production, in which personal profit can be acquired through investment of capital and employment of labor. Capitalism is grounded in the concept of free enterprise, which argues that government intervention in the economy should be restricted and that a free market, based on supply and demand, will ultimately maximize consumer welfare. These principles were most notably articulated in Adam Smith's treatise, The Wealth of Nations (1776), in which he opposed the prevailing theory of mercantilism. Capitalism has existed in a limited form in the economies of all civilizations, but its modern importance dates at least from the Industrial Revolution that began in the 18th cent., when bankers, merchants, and industrialists—the bourgeoisie—began to displace landowners in political, economic, and social importance and when innovations and efficiencies in commercial agriculture made available a large body of surplus labor, particularly in Great Britain. Capitalism stresses freedom of individual economic enterprise; however, government action has been and in some cases remains required to curb its abuses, which have ranged from terrible working conditions, slavery (particularly in Britain and the United States), and apartheid (in South Africa) to monopoly cartels and financial fraud.

Capitalism does not presuppose a specific form of social or political organization: the democratic socialism of the Scandinavian states, the consensus politics of Japan, and the state-sponsored rapid industrial growth of South Korea while under military dictatorship all have coexisted with capitalism. Yet despite the capitalist ideal of "hands-off" government, significant government intervention has existed in most capitalist nations at least since the Great Depression in the 1930s. In the United States, it exists in the form of subsidies, tax credits, incentives, and other types of exemptions. Though private production plays a major role in the economies of Germany and Japan, both nations have had centrally planned industrial policies in which bankers, industrialists, and labor unions meet and seek to agree to wage policies and interest rates; these countries reject the idea of letting the market wholly determine the economy. The collapse of the Soviet Union and its satellite states in Eastern Europe (1989–91) represented a substantial retreat in the power of capitalism's traditional economic opponent, socialism; while some of those nations have move toward free-market capitalism, in others the state retained or has reasserted its control over many aspects of the economy. In China, Communist economic principles were gradually abandoned during the late 20th cent. and capitalism became increasingly important—but within a strictly Communist political framework.

See M. Friedman, Capitalism and Freedom (1952, rev. ed. 1981); J. K. Galbraith, American Capitalism (1952, repr. 1982); J. A. Schumpeter, Capitalism, Socialism, and Democracy (1983); R. L. Heilbroner and L. C. Thurow, Economics Explained (1987); C. R Sunstein, Free Markets and Social Justice (1997); J. Appleby, The Relentless Revolution: A History of Capitalism (2010); E. E. Baptist, The Half Has Never Been Told: Slavery and the Making of American Capitalism (2014).



Capitalism is an economic system in which capital, or wealth, is put to use in order to create more capital. The system is characterized by private ownership of land and the means of production and distribution, which are used to make a profit with little or no government control. Capitalism provides the freedom to engage in economic activities based on the supply of resources and the market demand for goods; it promotes ingenuity and entrepreneurship. A capitalistic economy is also distinguished by a high degree of technological innovation due to several factors: competition, wages, and prices are based on market conditions; profit is the key consideration when making economic decisions; banking, insurance and credit systems are well-developed. Because of the element of competition, capitalism also results in the creation of wealth by the most cost-effective method, which lowers costs and prices, increases demand and production, and creates further economic opportunities.

Capitalism had its start in Western Europe in the seventeenth century with the discovery of new lands and colonization. Early capitalists were primarily merchants who dramatically increased their wealth through overseas trade. By the eighteenth century capitalism was the dominant economic system in England and the United States. Vast amounts of capital were being invested in machinery for factories, which eventually resulted in the Industrial Revolution. Industrialists replaced merchants as the primary figures in capitalistic societies. One of the greatest advocates of capitalism at the time was British economist Adam Smith (172390). In his work, An Inquiry into the Nature and Causes of the Wealth of Nations, Smith reasoned that economies operated best under a "natural law," which was primarily competition, and that they would be disrupted by government intervention. In the last decades of the nineteenth century and through the twentieth century, capitalism has taken another turn with a shift from ownership and management of industry by individuals to corporations.

See also: Capital, Entrepreneurship, Laissez Faire, Adam Smith


capitalism Economic system in which property and the means of production are privately owned. Capitalism is based on profit motive, free enterprise, efficiency through competition and a notion of freedom of choice. It was first articulated by Adam Smith in his treatise The Wealth of Nations (1776). Its development dates from the Industrial Revolution and the rise of the bourgeoisie. In practice, capitalist governments participate in economic regulation although to a lesser extent than a government within communism or socialism. See also free trade; Keynes, John Maynard; laissez-faire; Marxism; mercantilism; monetarism


cap·i·tal·ist / ˈkapətlist/ • n. a wealthy person who uses money to invest in trade and industry for profit in accordance with the principles of capitalism. • adj. practicing, supporting, or based on the principles of capitalism: the global economy is essentially capitalist. DERIVATIVES: cap·i·tal·is·tic / ˌkapətlˈistik/ adj. cap·i·tal·is·ti·cal·ly / ˌkapətlˈistik(ə)lē/ adv.

market economy

market economy Economy in which the operation of free-markets (where the forces of supply and demand operate without interference) control resources. The opposite of a market economy is a command economy, where market forces are under governmental control; in a mixed economy, there is partial governmental control.


cap·i·tal·ism / ˈkapətlˌizəm/ • n. an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.


capitation XVII. — F. capitation or late L. capitātiō, -ōn-, f. caput, capit- HEAD; see -ATION.



This entry includes two subentries:



capitalist, capitalist class See BOURGEOISIE.

market economy

market economy See CAPITALISM; MARKET.


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