Capitalism: Overview

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Capitalism: Overview

Capitalism has been the dominant economic system in the West since the nineteenth century and has increasingly spread across the globe. Characterized by unfettered markets in labor and natural resources, commodity production, and the reinvestment of profit, capitalism must be distinguished from other forms of commercial society that existed in early times or outside of the West, in which market-oriented activity remained ultimately subservient to political or moral goals. (Examples of such non-capitalist market society include the so-called mercantilism that preceded full-fledged capitalism in Europe and the city-state empires of the ancient Mediterranean world, which actively engaged in commerce yet did not generate capitalist socioeconomic relations.) Throughout its historyeven before it took rootcapitalism was a controversial idea that posed serious issues for philosophers, moralists, and social scientists alike.

Early Advocates

Perhaps the best-known and most important early exponent of capitalism was the Scottish economist Adam Smith (17231790). Smith employed the term capital in technical economic discussions contained in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), but he did not describe his economic system as "capitalism." Rather, the latter term seems to have arisen only in the nineteenth century. Smith preferred to speak about natural liberty, by which he meant simply that if everyone acts freely as they see fit in their own interests, then the welfare of the whole society will be best served. For Smith, the system of natural liberty constitutes a sort of automatic or homeostatic mechanism of self-adjustment (which he sometimes calls the "invisible hand"), so that any attempt (on the part of government or some other agent) to interfere in its operation will lead to greater inefficiency and hence less total welfare. The doctrine of natural liberty thus yields the founding principles of capitalism as an economic system. In turn, Smith applied this discovery not only to the operation of the marketplace but also to all aspects of society, including its educational, religious, and judicial institutions. He narrowly confines the role of government to those functions consistent with natural liberty: foreign defense, regulation of criminal activity, and provision of "public goods" too expensive for any single segment of the private economy to undertake.

The sources for Smith's insight about maximized individual liberty, unconstrained by coercive externalities, have been debated. Certainly, an earlier group of French economic theorists, known collectively as the Physiocrats, may have played a role in the formulation of this idea. Perhaps more importantly, as Albert O. Hirschman and others have argued, many influential political and moral theorists writing in the seventeenth and eighteenth centuries had promoted doctrines of human psychology and action that comported well with Smithian natural liberty. So-called heroic virtues were replaced with more mundane values in the writings of a wide range of early modern thinkers, including Niccolò Machiavelli (14691527), Thomas Hobbes (15881679), François de La Rochefoucauld (16131680), Anthony Ashley Cooper, third earl of Shaftesbury (16711713), and Bernard Mandeville (c.16701733).

The work of Smith inspired a school of thought known broadly as classical political economy. Its leading members in the nineteenth century, such as David Ricardo (17721823) and Thomas Malthus (17661834), extended and refined Smith's insights, often drawing in addition on the work of the utilitarian philosopher and social reformer Jeremy Bentham (17481832). In its most ruthless form, this position was combined with a reading of Darwinian biology to make the argument that capitalism, as a system of the survival of the fittest, was sanctioned by evolution, as in the Social Darwinism of Herbert Spencer (18201903). Nor were devotees of unlimited capitalism limited to the earliest stages of capitalist development. The neoclassical school of economic theory, exemplified by the work of Friedrich von Hayek (18991992) and Milton Friedman (b. 1912), continues to exercise considerable influence on all dimensions of social thought into the twenty-first century. The so-called rational choice or public choice economists persist in their belief that the free market relations realized only under capitalism constitute the single legitimate model of all social order.


Capitalism has by no means lacked for criticism from many different quarters. Communitarians, such as Henri de Saint-Simon (17601825), asserted that capitalists' concentration on competition and individual self-interest at the expense of social solidarity would ultimately corrupt and corrode communal order. Utopians, such as Charles Fourier (17721837), sought to replace capitalism's exploitation of labor with a free and creative socioeconomic system in which human potential could flourish. The anarchist Pierre-Joseph Proudhon (18091865), proclaiming that "private property is theft," denounced the collusion of state and capitalist enterprise and proposed to level the unequal distribution of the material benefits of work and to liberate workers to collaborate freely in their chosen activities. What all of these essentially left-wing responses to capitalism shared was a belief that cooperation rather than competition was the key to the improvement of human society and the amelioration of psychological as well as material misery.

The most famous nineteenth-century opponent of capitalism was Karl Marx (18181883), who, with his collaborator Friedrich Engels (18201895), offered far-reaching and systematic criticism based on a careful study of the inner operations of the capitalist economy. It is too seldom acknowledged that Marx shared more with the classical political economists than with capitalism's moralistic antagonists. In his unfinished masterwork, Capital (volume 1 published in 1867), Marx viewed himself as engaging in the "scientific" analysis of capitalism, borrowing heavily from Smith and his successors, while pointing out the structural weaknesses and limitations that the capitalist apologists had overlooked. In particular, Marx believed that the intense conflicts between capitalists and workers, as well as among capitalists themselves, would produce recurrent and ever-deepening economic, social, and political crises. Eventually the growing body of exploited industrial laborers, whom Marx labeled the proletariat, would recognize the source of its exploitation in the market-engendered condition of "wage slavery" and would revolt against the capitalist system as a whole.

Yet Marx did not dismiss lightly the accomplishments of capitalism. He maintained, instead, that the technological achievement of capitalism in constantly revolutionizing the means of production should be harnessed by any future communist society. Indeed, one of the inherent contradictions of capitalism was its inability to utilize fully its own productive capacity, a situation that would be rectified under communism. In sum, what singled out Marx's criticism of capitalism was its immanent character, in comparison to communitarians, utopians, and anarchists, whose critiques were based on standards external to capitalist economics.


One of the central issues in the conceptualization of capitalism has been the explanation of its emergence in the first place. Both classical political economists and orthodox Marxists provide essentially materialistic accounts rooted internally in the economic realm, whether arising from technological innovation, class conflict, urbanization, or demographic pressures. In the late nineteenth century, the endogenous position was challenged by the German sociologist Max Weber (18641920), who, in a series of studies ultimately published as The Protestant Ethic and the Spirit of Capitalism, argued against the validity of all such internal explanations for the growth of capitalism. Rather, Weber proposed that the emergence of a Calvinist version of Reformed Christian theology during the sixteenth and seventeenth centuries constituted the necessary and sufficient condition for capitalism's origins. According to Weber, the Calvinist Protestant was impelled to demonstrate to his community his worthiness for salvation (the certainty of which was by no means earned by external merit, as in Catholicism) by working hard and leading an ascetic life. Such hard work, however, produced economic gains and the temptation for leisure and luxury. What was the Calvinist to do with the deserved profits of his labors? The answer was to rid himself of his riches by investing them in further economic enterprises, which in turn yielded additional wealth. As an unintended consequence of the Calvinist renunciation of worldliness, the circulation of capital was born and with it the pattern of capitalist development. Weber's antimaterialistic explanation of capitalism directly challenged the primacy of the economic realm upheld by classical political economists and Marxists alike.

The response to Weber's thesis was loud and shrill on all sides, and there is good reason to believe that in its initial statement it misrepresents history. Yet the question of why capitalism emerged when and where it didor indeed at allremains a widely debated topic. One dimension of this discussion has been a debate raging since the 1940s, centered mainly within differing schools of economic history, concerning the transition from feudalism to capitalism. Scholars such as Paul Sweezy and Immanuel Wallerstein, elaborating on the earlier work of Henri Pirenne (18621935), postulated that a commercially stimulated push toward exchange relations, centered in the growing late medieval towns, undermined feudalism and introduced the basic principles of economic rationality. Other historians, such as J. A. Raftis, considering the radical depopulation of Europe at the end of the Middle Ages caused by recurrent and severe plagues, point to purely demographic factors among the laboring masses to account for disruptions in long-established patterns of land tenure that occasioned the decline of feudalism. Still another body of literature, represented by the research of R. H. Hilton and Robert Brenner, places local political factors arising from conflicts between peasant producers and seigneurial appropriators at the center of the transition to capitalist social relations. All of these views, however, share the conviction that material factors endogenous to economic life are adequate to explain the decline of feudalism and the emergence of capitalism.

By contrast, some later scholars, mindful of the pitfalls of the Weberian analysis, have nonetheless sought to proffer an "exogamous" account of the origins of capitalism. For example, Liah Greenfeld has posited a certain version of "nationalism" as the explanatory metric for the spread of the "spirit of capitalism." According to Greenfeld, England in the sixteenth and seventeenth centuries generated a form of nationalism that promoted the common wealth through the pursuit of individual profit, hence leading to the accumulation and circulation of private capital. In turn, the initial success of this nationalism pushed other European countries and regions to pursue similar nationalistic programs, with varied rates of success. As with Weber, Greenfeld maintains that "cultural" or "ideological" factors are required to explain the expansion of the capitalist economy.


With the demise of communism as an economic and ideological alternative to capitalism, many thinkers have proclaimed the final and ultimate victory of the capitalist system and its supposedly attendant sociopolitical values of democratic rights and individual liberty. According to Francis Fukuyama, for instance, history has proven that capitalism constitutes the best way of arranging the basic production and distribution of human goods. The global spread of capitalism signals an end to the contention between the fundamentally incommensurable economic ideas and doctrines; all that remains to be done is a fine-tuning of the balance between the private profit economy and those public goods that government is better qualified to provide. The process of capitalist globalization, then, represents nothing less than the civilizing of the human species.

Yet critics of capitalism persist, even in the face of optimism that capitalism will bring prosperity and well-being around the globe "in the long run." (The economist John Maynard Keynes [18831946] once famously quipped that "of course, in the long run, we're all dead.") Feminists point out that capitalism has done little to erase the economic and social disparities that exist between men and women. Authors concerned with race relations make a similar point about the market's failure to break down inequalities between people of differing skin colors and ethnicities. Environmentalists charge that capitalism's emphasis on unlimited growth as the only sustainable form of economy has led and will continue to lead to the ruin of the planet and, eventually, to the extinction of the human species. Latter-day communitarians and republicans hold that contempt for legal authority and civic virtue stems from the capitalist-inspired glorification of leisure and luxury. And religious authorities worldwide (including leaders of major Western churches, such as Pope John Paul II) have sternly criticized capitalism for eroding spiritual and moral values in favor of unrestrained accumulation and consumption. Capitalist ideas appear destined to remain controversial even, or perhaps especially, in the age of economic globalization.

See also Communism ; Economics ; Marxism .


Engelmann, Stephen G. Imagining Interest in Political Thought: Origins of Economic Rationality. Durham, N.C.: Duke University Press, 2003.

Fukuyama, Francis. The End of History and the Last Man. New York: Free Press, 1992.

Greenfeld, Liah. The Spirit of Capitalism: Nationalism and Economic Growth. Cambridge, Mass.: Harvard University Press, 2001.

Hirschman, Albert O. The Passions and the Interests: Political Arguments for Capitalism before Its Triumph. Princeton, N.J.: Princeton University Press, 1977.

Holton, Robert J. Cities, Capitalism, and Civilization. London and Boston: Allen and Unwin, 1986.

. The Transition from Feudalism to Capitalism. New York: St. Martin's, 1985.

Marx, Karl. Capital. Vol. 1. Translated by Samuel Moore and Edward Aveling. London: Lawrence and Wishart, 1974.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by R. H. Campbell and A. S. Skinner. Oxford: Clarendon; New York: Oxford University Press, 1976.

Weber, Max. The Protestant Ethic and the Spirit of Capitalism. Translated by Talcott Parsons. New York: Charles Scribner's Sons, 1958.

Wood, Ellen Meiksins. The Origin of Capitalism: A Longer View. 2nd ed. London: Verso, 2002.

Cary J. Nederman

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Capitalism: Overview

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Capitalism: Overview