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Capitalism

Capitalism

Preconditions and development

Modified capitalism

Capitalism and collectivism

BIBLIOGRAPHY

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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Stigler, George J. 1963 Capital and Rates of Return in Manufacturing Industries. A study of the National Bureau of Economic Research. Princeton Univ. Press.

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Capitalism

CAPITALISM

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.

Conclusion

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.

BIBLIOGRAPHY

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Baskin, Jonathan Barron, and Paul J. Miranti Jr. A History of Corporate Finance. Cambridge, U.K.: Cambridge University Press, 1997.

Bernstein, Michael A. The Great Depression: Delayed Recovery and Economic Change in America, 1929–1939. Cambridge, U.K.: Cambridge University Press, 1987.

Braverman, Harry. Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century. New York: Monthly Review Press, 1974.

Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Belknap Press, 1977.

Gerschenkron, Alexander. Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, Mass.: Belknap Press, 1962.

Gordon, David M., Richard Edwards, and Michael Reich. Segmented Work, Divided Workers: The Historical Transformation of Labor in the United States. Cambridge, U.K.: Cambridge University Press, 1982.

Heilbroner, Robert. "Inflationary Capitalism." New Yorker 55, no. 34 (8 Oct. 1979): 121–141.

Horwitz, Morton J. The Transformation of American Law, 1780– 1860. Cambridge, Mass.: Harvard University Press, 1977.

Jacoby, Sanford M. Employing Bureaucracy: Managers, Unions, and the Transformation of Work in American Industry, 1900–1945. New York: Columbia University Press, 1985.

Kulikoff, Allan. The Agrarian Origins of American Capitalism. Charlottesville: University Press of Virginia, 1992.

Lamoreaux, Naomi. Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England. Cambridge, U.K.: Cambridge University Press, 1994.

Montgomery, David. The Fall of the House of Labor: The Workplace, the State, and American Labor Activism, 1865–1925. Cambridge, U.K.: Cambridge University Press, 1987.

Moore, Barrington, Jr. The Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World. Boston: Beacon Press, 1966.

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Noble, David F. America by Design: Science, Technology, and the Rise of Corporate Capitalism. New York: Knopf, 1977.

Scranton, Philip. Endless Novelty: Specialty Production and American Industrialization, 1865–1925. Princeton, N.J.: Princeton University Press, 1997.

Vickers, Daniel. "Competency and Competition: Economic Culture in Early America." William and Mary Quarterly, 3d. Ser., 47, no. 1. (1990): 3–29.

Wallerstein, Immanuel. The Modern World-System: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century. New York: Academic Press, 1974.

Weber, Max. The Protestant Ethic and the Spirit of Capitalism. New York: Scribners, 1958.

Weiman, David F. "Families, Farms and Rural Society in Pre-industrial America." In Agrarian Organization in the Century of Industrialization: Europe, Russia, and North America. Edited by George Grantham and Carol S. Leonard. Research in Economic History, Supplement 5 (Part B). Greenwich, Conn.: JAI Press, 1989.

Weir, Margaret, and Theda Skocpol. "State Structures and the Possibilities for 'Keynesian' Responses to the Great Depression in Sweden, Britain, and the United States." In Bringing the State Back In. Edited by Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol. Cambridge, U.K.: Cambridge University Press, 1985.

Wright, Gavin. Old South, New South: Revolutions in the Southern Economy since the Civil War. New York: Basic Books, 1986.

———. "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 .

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Capitalism

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."

COMMERCIAL CAPITALISM

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.

AGRARIAN CAPITALISM

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.

INDUSTRIAL CAPITALISM

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.

URBAN CAPITALISM

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.

IDEOLOGIES OF CAPITALISM

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.

CONCLUSION

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 .

BIBLIOGRAPHY

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

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Capitalism

Capitalism

RESOURCE MARKETS: LAND AND LABOR

ENTREPRENEURSHIP AND THE BUSINESS FIRM

THEORETICAL CURRENT

BIBLIOGRAPHY

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.

RESOURCE MARKETS: LAND AND LABOR

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.

ENTREPRENEURSHIP AND THE BUSINESS FIRM

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.

THEORETICAL CURRENT

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

BIBLIOGRAPHY

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

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capitalism

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.

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capitalism

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

Bibliography

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).

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Market Economy

Market Economy

BIBLIOGRAPHY

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

BIBLIOGRAPHY

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

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Capitalism

CAPITALISM

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

bibliography

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

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capitalism

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).

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Capitalism

CAPITALISM


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

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capitalism

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

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capitalist

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.

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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.

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capitalism

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.

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capitation

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

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Capitalism

CAPITALISM.

This entry includes two subentries:

Overview
Africa

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capitalist

capitalist, capitalist class See BOURGEOISIE.

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market economy

market economy See CAPITALISM; MARKET.

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capitalist

capitalistbacklist, blacklist •handlist • cabbalist • cellist • checklist •playlist • wish-list •cartophilist, necrophilist, oenophilist (US enophilist) •nihilist • pugilist • homilist •bicyclist, tricyclist •stylist • cyclist • unicyclist •motorcyclist • hairstylist • shortlist •Gaullist, holist •spiritualist • fabulist •funambulist, noctambulist, somnambulist •oculist • populist •idealist, realist, surrealist •millennialist •ceremonialist, colonialist, neocolonialist •aerialist •editorialist, memorialist •industrialist •immaterialist, imperialist, materialist, serialist •trialist, violist •loyalist, royalist •dualist, duellist (US duelist) •intellectualist • conceptualist •textualist • mutualist • individualist •sensualist • contextualist •diabolist, kabbalist •cymbalist, symbolist •tribalist •herbalist, verbalist •medallist (US medalist) •feudalist • triumphalist • legalist •evangelist, televangelist •syndicalist • clericalist • physicalist •vocalist • animalist • maximalist •formalist • minimalist •analyst, annalist, cryptanalyst, panellist (US panelist), psychoanalyst •nominalist, phenomenalist •finalist, semi-finalist •communalist • regionalist •internationalist, nationalist, rationalist •sectionalist • conventionalist •Congregationalist, conversationalist, educationalist, representationalist, sensationalist •traditionalist • emotionalist •constitutionalist • functionalist •journalist, paternalist, photojournalist •papalist •monopolist, oligopolist •centralist •amoralist, moralist •oralist • neutralist •muralist, pluralist, ruralist •liberalist • naturalist • structuralist •agriculturalist, horticulturalist, multiculturalist •federalist • generalist •multilateralist, unilateralist •literalist • universalist •substantialist • specialist •consequentialist, essentialist, existentialist •racialist • provincialist • socialist •controversialist •catalyst, philatelist •documentalist, environmentalist, experimentalist, fundamentalist, instrumentalist, mentalist, orientalist, ornamentalist, sentimentalist, transcendentalist •fatalist • capitalist •recitalist, vitalist •Pentecostalist • anecdotalist •brutalist • medievalist •revivalist, survivalist •novelist

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Capitalism

Capitalism

Capitalism, as a way of organizing economic and social relations, has always depended on assertions about human inequality and valorization (including racism) that have been enforced through localities, states, and empires. It has not been the only economic system in human history to do so, but capitalism’s very definition and possibility relies on the exploitation of one or more groups by others, as Karl Marx pointed out during the rise of global, free-market capitalism in concert with European colonialism and imperialism. Marx, as a journalist, was a thorough chronicler of capitalism in nineteenth-century Europe, and his analysis in Das Kapital, completed in collaboration with Friedrich Engels, remains key to understanding the logic of capitalism.

Marx and Engels argued that capitalist relations necessitate the alienation of workers from the products they make, so that both the workers’ labor and what they produce become commodities circulating in an expanding market. Once laborers are seen as interchangeable workers (rather than artisans connected inextricably to what they make), it is in the interest of capitalists (those who invest in everything necessary to produce a product, including labor) to have low-wage or non-wage workers. In that way, capitalists can create surplus money from their initial investments as the commodities they have invested in circulate in the market. This surplus can be reinvested in the production of more commodities, with the capitalists (rarely the workers) making the decisions about what commodities—ranging from goods to services—to sell and how to convince consumers they need to exchange money for the commodities.

While capitalism seems to have begun in the fields, markets, and farm-related factories of England, it was a system that thrived through investment ventures such as the English East India Company and the Dutch East India Company, which linked commodities new to Europeans with low-wage labor and sources of raw material extracted with the backing of colonial guns and legislation. As Sydney Mintz documents in Sweetness and Power (1986), underpaid workers in England, urged by factory managers into the consumption of new commodities such as tea and sugar, were more tied than they knew to underpaid workers on the tea and sugar plantations in the Caribbean and South Asia, whose labor made empire-building possible. The commodity most vital to the success of early capitalism was human beings. For example, enslaved workers were shipped between colonial locations to facilitate monocropping on large plantations and to provide labor for constructing colonial cities like New York. As St. Clair Drake put it, “Commerce in black bodies rapidly became big business” (Drake 1990, p. 275).

Eric Williams, who was prime minister of Trinidad and Tobago from 1962 to 1981, pointed out the diversity of sources of enslaved labor across the colonial landscape. He noted, “Slavery was not born of racism: rather, racism was the consequence of slavery. Unfree labor in the New World was brown, white, black, and yellow; Catholic, Protestant and pagan.” (Williams 1994 [1944], p. 7) His terms are not those one would choose in the early twenty-first century, but his point is a significant one: Capitalists in the colonial era relied not on a single strategy for securing indentured and enslaved labor, but rather on a complex and global strategy. The overwhelming similarity, though, was the ability to view humans as commodities whose value floated with other commodities on the whimsical seas of the market. They were not seen as individuals with agency who had been ripped from their social networks. In his book Capitalism and Slavery, Williams argued that capitalists supported or renounced slavery according to its economic viability more often than in answer to a moral compass. Morality has certainly been important to the development of capitalism. As Max Weber documented in 1926, Protestant Christianity, and particularly Calvinism, was well suited to the managerial ideology of capitalists, because the predestination doctrine of Calvinists necessitated the worldly performance of good stewardship of resources.

From the outset, capitalists—or those investing in commodities and benefiting from surpluses by reinvesting them to become richer—have tended to be from the global North, white, and in control of the social apparatuses necessary to secure further profits—particularly states, militaries, and colonial authorities. While the low-wage or non-wage workers making capitalism possible have been more diverse, there has been an ideology, (described by theorists beginning with Marx and continuing actively in the early 2000s) or logic, facilitating capitalism that naturalizes the inequitable position between capitalists and the workers from whose labor they profit. This can be thought of as “strategic alterity,” or the “practice of shifting between strategic assertions of inclusion and exclusion (or the marking and unmarking of ‘selves’ and ‘others’) to both devalue a set of people and to mask that very process of strategic devalorization” (Kingsolver 2001, p. 110).

The labor forces on which capitalist arrangements have rested have been diverse, as Williams pointed out, but they have always been marked as different from the capitalists, and naturalized as inferior to them, meriting lower earnings in a polarized economy. Capitalism—in all its many forms and relationships—always ensures that polarization. The naturalization of differently valued actors in a capitalist economy most often happens through the lens of racism, but it also occurs through related distinctions, including sexism, nativism, ageism, and ethnic prejudice. One of the things that makes capitalism so flexible and enduring is that the lens can shift, but the justification remains, in capitalist logic, for what Étienne Balibar calls “class racism,” or “the institutionalized racialization of manual labor” (Balibar 1999, p. 327). In an article titled “Global Capitalism: What’s Race Got to Do with It?,” Karen Brodkin examines the shifting lenses used in exploitation. She concludes that “race in the United States has historically been a key relationship to the means of capitalist production, and gender constructions are what has made race corporeal, material, and visible” (Brodkin 2000, p. 239). Various kinds of institutionalized inequality—such as sexist, racist, and anti-immigrant legislation and social practice—have served capitalist formations by facilitating the rationalization and naturalization of non- and low-wage labor.

Colonized peoples were not passive in accepting the imposition of capitalism, whether it was in the shifting of massive numbers of people around the globe against their will to provide capitalist labor, or in the uncompensated extraction of raw materials that fueled the Industrial Revolution in Europe (and that, as Andre Gunder Frank has pointed out, resulted in ongoing North-South economic inequalities). The social and infrastructural damage done to colonized nations through colonial and capitalist extraction was foreseen and resisted by colonized peoples, in examples as wide-ranging as the Haitian Revolution in the 1790s and the Gandhian protests at the salt mines in India in 1930. These movements were fundamentally threatening to both colonialism and capitalism, which is why colonizing nations that were otherwise competitors in the global capitalist market closed ranks to blockade Haiti after its independence in 1804. Agency to resist the imposition of capitalist structures and their accompanying violent inequalities was diverse in its expressions across colonized nations. Kathryn Ward, for example, describes the Igbo Women’s War of 1929 in Nigeria as resistance to “incorporation into the capitalist world system.” Igbo women’s demands, as they occupied the British government buildings, were: “women should occupy one-half of the administrative units, and all white men should return from whence they came” (Ward 1988, p. 121–122).

Just as racism is intertwined with paternalism (constructing colonized people and low-wage workers as childlike), colonialism and neocolonialism have been intertwined with the creation and enforcement of economic and social dependence of nations of the South on nations of the North, with some exceptions. The colonial strategy of monocropping, as many have pointed out, made it impossible for a single colony to support itself, thus reinforcing dependence on the colonial trade system for basic commodities. Scientific-racist stories about inferior merit, evidenced by inferior performance in schools, workplaces, and markets, have been paralleled by just-so stories about Third World poverty. Critiques of both specious arguments have been based on close examinations of structural violence (see Harrison 1997) and the ways that, over time, racism and the infrastructural inequalities persisting from colonialism (referred to as “neocolonial relations”) have assaulted the possibilities of individuals and groups to thrive in the same ways as those who have consistently benefited from capitalist social and economic organization. While class relations, North-South relations, and racialized relations are compounded and confounded in myriad individual ways, they are nonetheless powerfully persistent and may be seen as responsible for a continually widening gap between rich and poor.

The partnership between capitalism and colonialism did not end with the widespread independence movements of the nineteenth and twentieth centuries. Those in globalized Northern countries have often, though not always, maintained neocolonial control of resources, markets, and infrastructure (e.g., transportation and educational systems) through ongoing control of debt relations. The post–World War II transnational economic organizations, including the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO), have allowed the United States and some European countries (the dominant voices in those bodies) to continue controlling the infrastructure of nations of the South through dictating the terms of loans. In the film Life and Debt (2001), for example, Michael Manley, the former prime minister of Jamaica, describes the difficulties faced by his country (particularly the local farmers and garment workers) when structural adjustment policies were imposed externally as part of a loan repayment plan, along with the enforced importation of U.S. agricultural goods and workers from other countries in the foreign trade zones.

With new forms of capitalism come new forms of racism, as Carter A. Wilson pointed out in Racism: From Slavery to Advanced Capitalism (1996). Workers in various countries are concerned about job restructuring and employers moving jobs to other regions or employing transnational migrant workforces. Unemployment-related anxieties can lead to xenophobic expressions, as documented in 1997 by Patricia Zavella in California, and new forms of racism that serve to rationalize both symbolic and physical violence. As Manning Marable notes in How Capitalism Underdeveloped Black America (1983), violence in current forms of capitalism is not only anti-immigrant, it is recurrently aimed at racialized minorities within states. The forced migration associated with colonialism, which was both impelled by and led to racist economic inequalities, was the antecedent to the persistent global North-South economic inequalities of the early twenty-first century. South-North migration has often been met with waves of racist, anti-immigrant sentiment, rather than any acknowledgment of the dependence of the North on the material and labor contributions of the South for its

“developed” status, long noted by Andre Gunder Frank and others.

These causal connections have been exposed clearly in the coalitions that are often labeled “antiglobalization,” but that are discussed in venues such as the World Social Forum, the complex relationship between racialized, gender, and other forms of social inequity and the organization and local expressions of global capitalism. One of the strategies within capitalist logic has been to divide class-based, antiracist, gender-based, and other forms of organizing by framing them as unrelated. Widespread coalitions critical of the current rapidly increasing polarization (and often white control) of wealth are forming analyses that view the bases of inequality—and the possibilities for economic equality—in a single, though still complex, frame (Alvarez, Dagnino, and Escobar 1997). One of the most promising avenues for addressing the intertwined inequalities resulting from capitalism, colonialism, and racism is global South-South networking, which can create an economic infrastructure free of colonial and neocolonial Northern control of financial investment, transportation, and markets. At the fifth Pan-African congress in 1945, alternatives to capitalism and imperialism—and associated racist oppression—were discussed. Proposals for a New International Economic Order—as raised in the United Nations Conference on Trade and Development and strengthened at the South-South dialogue convened in New Delhi in 1982—have led, decades later, to South-South trade agreements that use forms of capitalist strategies (combined with more democratic decision making than in the WTO) to try to address North-South with inequities resulting from capitalist practices reflecting paternalism and racism.

SEE ALSO African Economic Development.

BIBLIOGRAPHY

Alvarez, Sonia E., Evelina Dagnino, and Arturo Escobar, eds. 1997. Cultures of Politics/Politics of Cultures: Re-visioning Latin American Social Movements. Boulder, CO: Westview Press.

Balibar, Étienne. 1999. “Class Racism.” In Race, Identity, and Citizenship: A Reader, edited by Rodolfo D. Torres, Louis F. Mirón, and Jonathan Xavier Inda, 322–333. Oxford: Blackwell Publishers.

Black, Stephanie. 2001. Life and Debt. Produced and directed by Stephanie Black. Narration written by Jamaica Kincaid. Tuff Gong Productions.

Brodkin, Karen. 2000. “Global Capitalism: What’s Race Got to Do with It?” American Ethnologist 27 (2): 237–256.

Drake, St. Clair. 1990. Black Folk Here and There: An Essay in History and Anthropology. Vol. 2. Los Angeles, CA: Center for Afro-American Studies, University of California.

Frank, Andre Gunder. 1978. World Accumulation, 1492–1789. New York: Algora Publishing.

Harrison, Faye V. 1997. “The Gendered Politics and Violence of Structural Adjustment: A View from Jamaica. In Situated Lives: Gender and Culture in Everyday Life, edited by Louise Lamphere, Helena Ragoné, and Patricia Zavella, 451–468. New York: Routledge.

Jha, Lakshmi K. 1982. North South Debate. Delhi: Chanakya Publications.

Kingsolver, Ann E. 2001. NAFTA Stories: Fears and Hopes in Mexico and the United States. Boulder, CO: Lynne Rienner Publishers.

Marable, Manning. 1983. How Capitalism Underdeveloped Black America: Problems in Race, Political Economy and Society. Boston: South End Press.

Mintz, Sidney W. 1986. Sweetness and Power: The Place of Sugar in Modern History. New York: Viking.

Ward, Kathryn B. 1988. “Female Resistance to Marginalization: The Igbo Women’s War of 1929.” In Racism, Sexism, and the World-System, edited by Joan Smith, Jane Collins, Terence K. Hopkins, and Akbar Muhammad, 121–135. New York: Greenwood Press.

Weber, Max. 2001 (1926). The Protestant Ethic and the Spirit of Capitalism. London: Routledge.

Williams, Eric. 1994 (1944). Capitalism and Slavery. Chapel Hill: The University of North Carolina Press.

Wilson, Carter A. 1996. Racism: From Slavery to Advanced Capitalism. Thousand Oaks, CA: Sage Publications.

Zavella, Patricia. 1997. “The Tables are Turned: Immigration, Poverty, and Social Conflict in California Communities.” In Immigrants Out! The New Nativism and the Anti-immigrant Impulse in the United States, edited by Juan F. Perea, 136–161. New York: New York University Press.

Ann Kingsolver

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Capitalism

CAPITALISM

Among the claims of the contemporary literature known as "Islamic economics" is that Islamic law provides an economic system conducive to free exchange. Where this system allegedly differs from capitalism, which also promotes economic freedoms, is that it avoids sharp inequalities, chronic corruption, and mass exploitation. If Muslims restructure their economic relations according to Islamic stipulations, say the proponents of Islamic economics, they can obtain all the benefits of capitalism without incurring its costs. Specifically, they can achieve prosperity, steady innovation, and material security—all traits associated with today's advanced market economies—within a framework based on honesty and brotherly cooperation.

If this logic resonates with many Muslims, the reason is that the current economic performance of the Islamic world is generally disappointing. The predominantly Muslim countries included in the annual "Corruption Index" of Transparency International all rank as substantially "more corrupt" than the typical advanced economy. Except for the small oilexporting countries of the Arabian peninsula, not a single Muslim-governed state is among the world's wealthiest countries, and many Muslim countries are impoverished. The Islamic world's participation in world trade is low in relation to its share of global population. Although the basic economic institutions of the Islamic world are formally similar to those of the successful market economies, there is a consensus that they do not perform as well.

Like many secular critics of capitalism, Islamists attribute this situation to Western imperialism. Starting in the eighteenth century, they argue, European traders and financiers, along with the states that supported them, destroyed local crafts, monopolized natural resources, secularized the judicial system, and gradually took over key aspects of economic governance. They also lowered the Islamic world's standards of honesty and weakened its ethic of brotherly cooperation.

Institutional Sources of Underdevelopment

In fact, European imperialism was a result, rather than the leading cause, of the Islamic world's economic shortcomings. Prior to embarking on the global colonization drive whose results included the economic subjugation of the world's Muslim peoples, the West underwent a sustained institutional transformation that gave rise to modern capitalism. During this transformation, which began around the eleventh century, the institutions of the Islamic world also experienced changes, but these were relatively minor. As late as the nineteenth century, the contractual forms recognized by the Islamic court system were essentially those developed a millennium earlier. The concept of a juridical person had no place in Islamic law. Nor did Islamic law recognize joint-stock companies or corporations. Although money lending remained a flourishing profession among both Muslims and non-Muslims, there were no banks. For these reasons, among others, the Islamic world's economic system was now inefficient in relation to the emerging capitalist system of the West. It is this handicap that subjected the Middle East and the rest of the Islamic world to Western economic domination.

As this domination was taking shape, the Islamic world experienced no general economic decline in the absolute sense. But it started showing clear signs of underdevelopment, as measured by the living standards, productivity levels, and institutional dynamism prevailing in the West.

In early stages of the West's economic ascent, the Islamic world's market institutions were at least as efficient as their Western counterparts, and in some respects more so. Its partnership laws, which were codified by jurists generally familiar with the needs of merchants and investors, gave traders a remarkable array of contractual options. Although interest was formally banned, financiers easily circumvented the prohibition, which, in any case, was often interpreted loosely, as disallowing only exploitative interest charges. Disputes between partners, and between buyers and sellers, were settled informally through arbitration or formally through the Islamic courts, whose jurisdiction covered all economic transactions. A wide range of social service organizations, including schools, charities, commercial centers, and rest stops for caravans, were established in a decentralized manner through waqfs, or Islamic trusts. The typical waqf also served as a wealth shelter, for its assets were relatively safe from confiscation and its founder could shower himself, his relatives, and even his descendants with material benefits. To a degree, the privileges enjoyed by waqf founders compensated for the chronic weakness of private property rights. For several centuries—estimates of the end point range from the fourteenth century to the eighteenth century—this system afforded the Islamic world a standard of living that was equal, if not superior, to that of Europe.

The Rise of Modern Capitalism

Meanwhile, the West underwent the momentous structural transformation that resulted in capitalism. This transformation included the strengthening of individual property rights, the recognition of juridical persons in a growing number of sectors, and a sustained broadening of the menu of contractual forms available to investors, traders, workers, and consumers. By the eighteenth century, and unmistakably by the nineteenth, the relative sophistication of Europe's economic institutions allowed its financiers and merchants to dominate economies all across the globe. The main reason why the Islamic world fell into a state of underdevelopment is that changes taking place outside the Islamic world had the effect of reducing the efficiency of pre-capitalist economic institutions based on Islamic law.

Why Islamic law itself failed to generate the basic institutions of capitalism has long been a matter of controversy. One thing is certain. The explanation is not, as nineteenth- and early-twentieth-century thinkers were inclined to believe, that Islam is inherently hostile to commerce or prosperity. The classical sources of Islam are replete with provisions designed to facilitate exchange and production. Nor can the lag be attributed to policies aimed at retarding growth. The Islamic world's structural transformation was delayed because certain institutions well suited to the economic conditions of classical Islam produced unintended consequences.

Unintended Consequences

One of these institutions was the Islamic inheritance system. Outlined in the Qur˒an, the Islamic inheritance system requires two-thirds of a person's estate to be apportioned among members of his or her extended family according to criteria dependent on the composition of the possibly numerous heirs and their relationships to the deceased. Prior to the modern era, this system raised the cost of keeping productive enterprises intact across generations. Equally important, because the death of even one partner resulted in termination of the enterprise, and in the dissolution of its assets, the prevailing inheritance rules created incentives for keeping partnerships small and ephemeral. Consequently, the growing complexity that characterized the productive, financial, and commercial enterprises of Europeans was not observed in territories under Islamic law. By contrast, the relative flexibility of European inheritance regimes allowed practices designed to keep estates intact, such as primogeniture. These practices facilitated the establishment of larger and longerlasting enterprises, which then stimulated the development of increasingly sophisticated accounting systems, specialized markets, and contractual forms in order to minimize operating costs.

Until the Western-inspired economic reforms of the nineteenth century, Islamic civilization offered no corporate structures capable of serving as prototypes for durable financial or mercantile organizations. The one major Islamic institution that some consider an exception is the waqf. Established to provide a service in perpetuity, a waqf, like a corporation, was meant to outlive its founder and employees. Nevertheless, it lacked most of the freedoms associated with corporate status. Most significant, it was supposed to refrain from remaking its internal rules and modifying its objectives. Still another unintended effect of the waqf system was that, by enhancing material security, it dampened incentives for seeking stronger property rights. Economic historians generally believe that in the West the strengthening of individual property rights played a critical role in the rise of modern capitalism.

By the nineteenth century, it was clear that the traditional economic institutions of the Islamic world had become a liability. The institutional borrowings that followed included new forms of organization, including complex partnerships, joint-stock companies, and corporations. Another historical break that occurred at this time was the establishment of various secular courts to adjudicate commercial and financial disputes involving contractual forms alien to traditional Islamic law.

Weberian Thesis

The foregoing institutional explanation for the under-development of the Middle East calls into question its most celebrated alternative: the Weberian thesis, which traces the origins of capitalism to the ideological creativity of the Protestant Reformation. Weber's argument was challenged by R. H. Tawney, who showed that capitalist institutions preceded, even created, what Weber called the capitalist spirit. Tawney's observation suggests that where capitalist institutions failed to evolve through locally driven processes, as in the Islamic Middle East, vigorous and successful entrepreneurship would be limited.

At the time that Weber wrote, bilateral trade between the Islamic world and western Europe was almost entirely under the control of Europeans, who provided much of the requisite financing, know-how, and transportation. It thus seemed that the Middle East lacked the entrepreneurship essential to modern capitalism. In fact, the infrastructure of capitalism was inadequate, and Middle Easterners, being latecomers to operating under modern economic institutions, lacked basic experiences and resources. Significantly, it was during the twilight of the traditional Islamic economic order and the transition to modern capitalism—the eighteenth century to the early twentieth century—that the Christians and Jews of the region by and large gained economic ground against its Muslims. Entitled since the early days of Islam to choice of law, which they had sometimes exercised in favor of indigenous non-Muslim contractual forms, the Christian and Jewish religious minorities began using modern contractual forms about a century before Muslims were able to do so. Equally important, many operated under the protection of European-operated courts, as opposed to local Islamic courts.

See alsoCommunism ; Economy and Economic Institutions ; Globalization .

BIBLIOGRAPHY

Çizakça, Murat. A Comparative Evolution of Business Partnerships: The Islamic World and Europe, with Special Reference to the Ottoman Archives. Leiden: E. J. Brill, 1996.

Ibrahim, Mahmood. Merchant Capital and Islam. Austin: University of Texas Press, 1990.

Issawi, Charles. "The Entrepreneurial Class." In The ArabWorld's Legacy. By Charles Issawi. Princeton, N.J.: Darwin Press, 1981.

Kuran, Timur. "Islam and Underdevelopment: An Old Puzzle Revisited." Journal of Institutional and Theoretical Economics 153 (1997): 41–71.

Kuran, Timur. "The Provision of Public Goods under Islamic Law: Origins, Impact, and Limitations of the Waqf System." Law and Society Review 35 (2001): 841–897.

Rodinson, Maxime. Islam and Capitalism. Translated by Brian Pearce (1966). Reprint, New York: Pantheon, 1973.

Timur Kuran

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Capitalism

CAPITALISM

note:Although the following article has not been revised for this edition of the Encyclopedia, the substantive coverage is currently appropriate. The editors have provided a list of recent works at the end of the article to facilitate research and exploration of the topic.

Sociology has no complete, formal consensus on a specific definition of capitalism. The discipline of sociology itself arose as an attempt to understand and explain the emergence and nature of modern capitalist societies. Sociology's founding theorists were very much concerned with the development of capitalism. Émile Durkheim sought to find the bases of new forms of morality and social solidarity in the division of labor, which capitalism both expanded and accelerated (Durkheim 1984). Karl Marx, of course, spent his adult life analyzing and criticizing capitalist society. Marx's project was guided by his hope and expectation that capitalism would be displaced as history moved toward a socialist, and then communist, future. Max Weber, too, devoted considerable attention to the origins of modern capitalism and the historically specific character of Western society under capitalist expansion. Contemporary sociology's treatment of capitalism is grounded in the works of these theorists. The works of Marx and Weber, insofar as they more explicitly focused attention on the dynamics of capitalism, provide a point of departure for discussing modern sociology's approaches to capitalism.

The term capitalism is sometimes used to refer to the entire social structure of a capitalist society. Unless otherwise indicated, it is used here with specific reference to a form of economy to which multiple social institutions are effectively bound in relatively compatible ways. Weber used the term capitalism in a very general way: "wealth used to gain profit in commerce" (Weber 1976, p. 48). This understanding of capitalism permits the discovery of capitalism in a wide variety of social and historical settings. Weber describes this general form of capitalism in traditional India and China, ancient Babylon, Egypt, and Rome and in medieval and modern Europe. However, Weber also constructs a more specific typology that pertains to the form that capitalism has taken in more contemporary Western society. This form of capitalism is referred to as modern, or Western, capitalism. In The Protestant Ethic and the Spirit of Capitalism, Weber (1958 pp. 21–22) contends that this is "a very different form of capitalism which has appeared nowhere else" and that it is unique in its rational "organization of formally free labor." Other important characteristics of modern capitalism, such as the separation of business from the household and rational bookkeeping, derive their significance from this peculiar organization of labor. In this emphasis on the importance of free labor, or the creation of a labor market, Weber's definition of capitalism moves much closer to Marx's use of the term.

For Marx, it is the creation of a market for human labor that is the essence of capitalism. Marx wrote that capitalism can "spring into life only when the owner of the means of production and subsistence meets in the market with the free laborer selling his labor power" (Marx, quoted in Sweezy 1970 pp. 56–57). The emergence of the free laborer represents the destruction of other noncapitalist economic forms. Feudal or slave economies, for example, are not characterized by the recognized right of laborers to sell their own labor power as a commodity. Simple commodity production, or economies in which laborers own their own means of production (tools, equipment, etc.), are not characterized by the need for laborers to sell their labor power as a commodity. In the latter case, Weber concurs with Marx that this freedom is only formal since such laborers are compelled to sell their labor by the "whip of hunger."

The sociological conception of capitalism also varies with particular theoretical understandings of the nature of history. Marxists, guided by an evolutionlike vision of history, tend to see capitalism as a stage in humanity's progressive movement to a communist future. In this manner, Marxist sociology also often refers to various phases of capitalism. Wright (1978 pp. 168–169), for example, describes six stages of capitalist development: primitive accumulation, manufacture, machinofacture, monopoly capital, advanced monopoly capital, and state-directed monopoly capitalism. The implicit assumptions of law-like forces at work in the historical process are evident in the Marxist confidence that capitalism, like all previous socioeconomic orders, will eventually be destroyed by the internal contradictions it generates. References to the current stage of capitalism as "late capitalism" (e.g., Mandel 1978), for instance, reveal a belief in the inevitability of capitalism's demise.

The Weberian tradition, on the other hand, rejects the assumption of history's governance by "iron laws." This leads to a recognition of various types of capitalism but without the presumption that capitalism must eventually be eliminated. The Weberian tradition discovers in the history of Western capitalism a process of rationalization toward depersonalization, improved monetary calculability, increased specialization, and greater technical control over nature as well as over persons (Brubaker 1984). However, while the Weberian tradition can expect the probability of continued capitalist rationalization, it does not predict the inevitability of such a course for history. It is important to note that, for Weber, a transition from capitalism to socialism would probably only further this rationalization. Such developments were seen as associated with industrial society and bureaucratic forms of domination rather than with capitalism per se.

This background permits a more detailed examination of contemporary sociology's treatment of capitalism. Already, it can be seen that sociology's understanding of capitalism is more specific than popular conceptions of capitalism as simply "free-market" or "free-enterprise" systems. This is especially so insofar as sociology focuses its attention on modern society. It is the emergence of a "free market" in human labor that sociology tends to recognize as the distinguishing characteristic of modern capitalism. For Durkheimian sociology, this market guides the normal division of labor that is the basis of social solidarity. In this view, the absolute freedom of such a market is necessary to generate the conditions of equal opportunity that are required to guarantee norms by which people come to accept capitalism's highly developed division of labor. Under conditions of a truly free labor market, the stratification system is seen as legitimate since individuals attain their position through their own achievement and not by means of some ascribed status (e.g., caste, gender, race, ethnicity, nepotism) or political patronage. For Marxian sociology, it is in this labor market that the two fundamental and opposing classes of capitalism meet: the owners of the means of production or capitalists (bourgeoisie) and the workers (proletariat). In this view, the struggle between these two classes is the dynamic force behind capitalist development. For Weberian sociology, this market for human labor is necessary for the development of the advanced and superior calculability of capitalist economic action. This calculability is, in turn, a fundamental component of the rationalization process in modern Western society.

This transformation of human labor into a commodity is the force behind both capitalism's internal dynamism as well as its outward expansion. On the one hand, capitalism is constantly driven to enhance its productivity. This compulsion of modern capitalism continuously to develop its technical capacity to produce is not driven simply by competition among capitalists but is related to the unique role that human labor plays in capitalist production. Prior to the emergence of a market for human labor, premodern forms of capitalism exhibited no such pressure constantly to revolutionize the technical means of production. Modern capitalism's dependence on human labor as a commodity, however, demands that this cost of production be kept as low as possible. First, technological development can lower the cost of labor as a commodity by vastly increasing the production of mass consumer goods. The subsequent reduction in the cost of items like food and clothing translates into reductions in the cost of wages to sustain laborers and their families. Another means to this end is automation, the creation of technology that can replace or enhance human labor. Such technological development also permits capitalists to circumvent the natural limits of the human body to labor and the tendency of laborers to organize and demand higher wages, especially important spurs to technological development in capitalist societies characterized by a shortage of labor. However, under such conditions the capitalist's demand for profitability may limit the internal expansion of technology as a means of increasing production (i.e., capital-intensive production) in favor of an outward expansion that draws upon new sources of labor. This expansion of capitalism can take two basic forms. On the one hand, there is a drive toward proletarianization, or the inclusion of more and more of society's population segments that have previously escaped the labor market. On the other hand, there is a tendency to reach outside of the society itself toward other societies, thus incorporating ever larger regions of the world into the sphere of capitalism.

In the early development of capitalist societies, peasants are freed from feudal relations and slaves are freed from slave relations to add to the available pool of labor. This transformation is rarely a smooth one. The great revolutions in Western Europe and the U.S. Civil War forced these precapitalist classes to surrender their workers to the capitalist labor market. Another major source of labor for capitalist expansion has been independent laborers or persons who "work for themselves." Farmers who own their own land and equipment and work without hired labor are a good example of the type of self-employed producer that sociologists commonly refer to as simple commodity producers. There are other occupations in this general classification, of course. Highly skilled laborers have at times been able to retain independence from capitalist labor markets. However, capitalism has displayed a powerful capacity to bring these laborers into the sphere of capitalist, wage labor relations. For example, carpenters, mechanics, butchers, even doctors and lawyers increasingly find themselves working for wages or a salary in a capitalist firm rather than working for themselves. From time to time, the number of self-employed appears actually to rise in certain capitalist societies (Bechhofer and Elliott 1985). This is usually the result of the introduction of some new technology or new service. Sometimes persons who strongly wish to be their "own bosses" are able to take advantage of specific market conditions or are willing to sacrifice potential income to achieve this status. But clearly, if capitalist societies are examined over the course of the last 200 to 300 years, the tendency is strongly toward increased absorption of persons into the capitalist labor market.

In recent times, labor markets in nations like the United States have found another major source of labor power in women. The traditional role of homemaker impeded the inclusion of women in the labor market. That role of women within the home has changed somewhat, but the role played by women in expanding the pool of labor available to capital has increased tremendously. According to Christensen (1987), for example, in 1960 30 percent of American mothers were employed; in 1986, 62 percent were employed. Ethnic minorities have often performed a similar function in expanding the size of the labor market. Succeeding waves of immigrants have frequently played an initially marginal role in the labor market, only to be gradually absorbed into more routine participation as time passes.

Capitalism's inherent expansionary tendencies also push the capitalist society to reach beyond the borders of the nation. This expansion occurs as capitalism seeks markets for its products but also in the search for raw materials and cheaper labor to produce goods for the home market. Eventually, capitalism may simply seek profitable investment outlets outside the nation of origin. Sociology has analyzed capitalism's transnational expansion with two general but conflicting theoretical approaches. Modernization theory views this expansion in a positive way, seeing it as a means by which undeveloped societies are enabled to begin the process of development that the developed societies have already achieved. This theoretical orientation has been especially important in shaping development policies directed at the "third world" by many Western governments, the World Bank, and even the United Nations (Giddens 1987).

Sociology's other basic approach to the emergence of a world-scale capitalist economy involves a more critical interpretation. This view tends to see capitalist expansion as having actually caused underdevelopment. The underdevelopment approach sees the lack of development in less-developed societies (periphery) as a consequence of systematic exploitation of their people and resources by the advanced societies (core). This process of underdevelopment is generally viewed as having occurred in three stages. The first stage, that of merchant capitalism, persisted from the sixteenth century to the late nineteenth century. Merchant capitalism, supported by military force, transferred vast amounts of wealth from the periphery to the European nations to help finance initial industrial development in what are now the advanced capitalist societies. The second stage, colonialism, persisted until about ten to fifteen years after World War II, when many colonial nations were granted formal independence. In the colonial stage, the developed societies organized economic and political institutions in the less-developed nations to serve the needs of industrial capitalism in the advanced nations. In the postcolonial period, formal political independence has been granted, but the persistent economic inequalities between developed and underdeveloped nations strongly favor the more-developed capitalist societies. Even when raw materials and finished products remain in the lesser-developed nation, the profits derived from such production are taken from the periphery and returned to the advanced core societies. Thus, the pattern of underdevelopment continues in the face of formal independence.

Traditionally, much of sociology's attention to international capitalist expansion has focused on relations between nations. Increasingly, sociology is examining these matters with greater attention to relations between classes. This shift of emphasis reflects the increasing importance of the transnational corporation in recent times. The transnational corporation's greater capacity to use several international sites for component production and the shift of much industrial production to underdeveloped regions are generating a process of deindustrialization in the advanced capitalist societies. While capitalism has long been a world system, many sociologists contend that the transnational, or "stateless," corporation has significantly less commitment or loyalty to any specific nation. Capital flows ever more rapidly throughout the world, seeking the cheapest source of labor. Modern computer technology has facilitated this trend. Asian, European, and North American capital markets are increasingly interdependent. Sociology's shift of emphasis reflects this tendency for the U.S. capitalist to have more in common, sociologically, with the Japanese or German capitalist than the U.S. investor has in common with the American worker. Sociology's new attention to the internationalization of capital may present a need for rethinking the usefulness of the nation as the typical boundary of a society. The emergence of the "new Europe" and the demise of state socialism in Eastern Europe and the USSR may also lead to a more flexible notion of what constitutes a society.

The preceding discussion has focused on capitalism as a specific form of economy that is defined by the expansion of a labor market in which propertyless workers sell their labor power for money. Capitalist societies are, of course, far more complex than this. There are a number of distinct economic forms that coexist with capitalism in both complementary and conflictual relations. The capitalist economy itself may be broken down into two basic sectors, one representing big business and one representing small business. Sociologists usually refer to these as the monopoly sector and the competitive sector. This dual economy is reflected in a segmented, or dual, labor market. Monopoly sector workers are more likely to be male, unionized, receive better wages and benefits, have greater job security, and work in a more clearly defined hierarchy of authority based on credentials. Competitive sector workers are less likely to possess strong credentials, more likely to be female, receive lower pay, work under more dangerous conditions, and work without union protection, benefits, or job security.

Noncapitalist economic forms also exist alongside this dual capitalist economy. The self-employed reflect a form distinct from modern capitalism that sociologists commonly refer to as simple commodity producers or petite bourgeoisie. These people produce goods and services (commodities) for sale on the market, but they work for themselves and use only their own labor in production. Most capitalist societies also contain cooperative economic organizations that are distinct from capitalist enterprises. Cooperatives are commercial, nonprofit enterprises, owned and democratically controlled by the members. The nonprofit status and democratic distribution of control (one member, one vote) set cooperatives apart. The cooperative is an especially important form of economic organization for those simple commodity producers, like farmers, described above. All capitalist societies today also contain elements of socialist economy. Key social services, such as health care, and even some commodity production are provided by the state in many societies commonly recognized as capitalist. The United States is perhaps among the most resistant to this movement toward mixed economy. Yet even the United States has, to some extent, socialized education, mail delivery, libraries, police and fire protection, scientific research and technological development, transportation networks (e.g., highways, airports, urban transit), military production, industrial infrastructure provision, and so on. The mixed character of this economy is further indicated by the common practice of the government contracting capitalist firms to produce many goods and services. In a related way, the development of welfare has influenced the nature of capitalist society. The increased intervention of government into the economy has generated the notion of the welfare state. While popular conceptions of the welfare state tend to focus on the role that government plays in alleviating the impacts of poverty on individuals, sociology also recognizes that welfare reduces the cost of reproducing the commodity—labor. In this sense, welfare functions, in the long run, as a subsidy to capital. Further, many of the socialized sectors of capitalist economies function to ensure a profitable environment for capitalist firms (O'Connor 1973; Offe 1984). In many instances, such subsidization of capital is biased toward the largest corporations.

Some sociologists have contended that the rise of the large capitalist corporation, with its dispersed stock ownership and bureaucratic form of organization, has eroded the power of individual capitalists to control the corporation in which they have invested their capital. Instead, it is argued, bureaucratic managers have gained control over corporate capital. Such managers are thought to be relatively free of the drive to maximize profits and are willing to accept average rates of profit. In this way, the ruthless character of earlier forms of capitalism are seen as giving way to a capitalism that is managed with broader interests in mind. Further, the dispersal of ownership and control is said to eliminate the misuse of capital in the interests of an elite and wealthy minority. This "managerialist" position complements pluralist political theory by providing greater authority for institutions of representative democracy to control the allocation of society's resources.

This view is challenged in a variety of ways. Other sociologists contend that while management may have gained some formal independence, its job requires devotion to profit maximization, and its performance is assessed on this criteria. In this view, the larger companies' executives and owners are able to use interlocking directorates and their common class background (e.g., elite schools, private clubs, policy-planning organizations) to minimize price competition and thus sustain high profit levels. Others argue that those informal ties are of less consequence than their common dependency on banks. In this view, banks, or finance capital, play a disproportionately powerful role in centralizing control over the allocation of capital resources. This position strongly opposes the managerialist arguments and those who envision an independent corporate elite whose power lies in the control of corporate bureaucracies rather than in personal wealth (Glasberg and Schwartz 1983). Further, to the extent that it is valid, this argument is particularly important given the increasing internationalization of capital discussed above, since a great deal of that development has occurred in the sphere of finance capital.

These sorts of arguments reflect an important shift in sociology's understanding of the relationship between capitalism and democracy. Sociology's Enlightenment roots provided a traditional legacy of viewing capitalism and democracy as intertwined in the process of modernization. While this parallel development is certainly recognizable in early forms of modern capitalism, more recent forms of capitalism call into question the extent to which capitalism and democracy are inevitably bound together. Indeed, recent works suggest that capitalism and democracy are now opposed to one another (e.g., Piven and Cloward 1982). This view holds that the tremendous inequality of wealth generated by modern capitalism impedes the possibility of political equality. Even conservative writers (e.g., Huntington 1975) have noted the problematic relationship between contemporary capitalism and democracy, suggesting a retrenchment of democratic forms in defense of capitalism. The future of capitalism will be shaped by this tension with democracy, but that tension itself is located in an increasingly global economy. At the moment, the politics of capitalist society seem to lag behind the economic changes. The individual is increasingly pressured to sell his or her labor as a commodity on a world market, yet at the same time that individual remains a citizen, not of the world, but of the nation. The transnational capitalist enterprise and the flow of capital, on the other hand, are ever more free of such national borders.


(see also: Marxist Sociology; Postindustrial Society)


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Patrick H. Mooney

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Capitalism

Capitalism

Overview
History
Theory in Depth
Theory in Action
Analysis and Critical Response
Topics for Further Study
Bibliography
See Also

OVERVIEW

who controls government? Elected officials

how is government put into power? Elected by the masses

what roles do the people have? Sustain the free market

who controls production of goods? Owners of capital

who controls distribution of goods? Owners of capital

major figures Adam Smith; John Locke

historical example United States

Capitalism is more than an economic system. It's an entire ideology centered around the idea of the individual's right to choose his work, his goals, and his life's details. Capitalism is based on the relationships between the capitalists, the consumers, and the laborers. Capitalists essentially acquire or create goods for less than they sell them. Capitalism has dominated the Western Hemisphere since the Roman Empire began to tumble and, following that, the feudal system disintegrated. Markets determine the production and distribution without government involvement, and the economy and the government remain separate. Its development began, officially, in the 16th century, but the idea started in the ancient world and there have been healthy capitalistic niches ever since. The first major work on capitalism was written by Adam Smith in 1776, Inquiry into the Nature and Causes of the Wealth of Nations, and along with his detailed analysis of capitalistic theory began a more structured and formally recognized ideology.

HISTORY

Capitalism could not exist without the presence of a market. Marketplaces have existed for several thousand years. There are documented markets and trading relationships between the pharaohs of Egypt and the ancient Levantine kingdoms around 1400 B.C. In 400 B.C., there are records of a rich trading network and commodity exchange in addition to a complicated market in classical Greece and Rome.

These healthy market and trading systems show the historical basis of money, mercantile groups and the idea of profit, but there was not a market system like exists today. Markets joined suppliers and demanders but what was supplied did not change based on the details of demand. Markets existed to provide luxuries to those who wanted them but did not satisfy the essential needs of society. The essentials were taken care of according to tradition, with slavery as the labor source. Living one's life to benefit another was looked down upon for the free man, however, as articulated by the philosopher Aristotle.

Capitalism as it is today is relatively new, but the ideas of markets and profits have been in place for thousands of years. Formally, capitalism began during the Middle Ages with the mercantilist period. The ideology has been around since before the philosophers Aristotle and Plato, however. Plato (428–348 B.C.) began to outline some of the structural ideas of capitalism in terms of freedom and liberty, but subscribed more to communist and community based ideology then to the individualism that defines capitalism. Plato argued that guardians were needed to protect people from injustice and from invasion. He felt that they should share the state's wealth by keeping properties public to ensure equality. He also thought that by allowing people to privately own their own homes and properties they would necessarily become enemies rather than neighbors in mutual protection of one another. The theory of communal living continued but the beginnings of individualistic capitalism were sprouting as well, growing with along the ideas of freedom and liberty.

The idea of capitalism grew from individualistic notions. In religion, this led to the Reformation. In politics, this led to democracy, and with the economy, this led to the capitalistic system. Capitalism has its origins in Rome, in the Middle East, and in Europe in the Middle Ages. Its earliest organized form was called mercantilism, the production and distribution of goods to make a profit.

Mercantilism

Mercantilism began in Rome in its simplest form. The merchants bought goods for less than they sold them. The Roman Empire expanded, and mercantilism grew along with it. As the empire began to shrink in the fifth century, however, so too did mercantilism. By the 700s it was only a small slice of the culture of Europe. During this same period, though, capitalistic practices were thriving in Arabia. The Arab culture existed in the trade routes between three empires: Egypt, Persia, and later, the Byzantium. Islam spread across the Middle East, Asia, Spain, and North Africa in the 700s. Mercantilism spread along with Islam, and its success is evidenced by the number of economic words derived from Islam such as traffic and tariff.

In Europe, the medieval culture relearned the ideas of mercantilism and capitalism from its Arabic neighbors. By the 1300s, Europe had fully absorbed mercantilism and was starting to expand through mobility and mercantilism. Europeans and Arabs alike began to explore the globe. These voyages were inspired by mercantilist thoughts and dreams.

CHRONOLOGY

c. 1400 B.C.:      Trading relationships exist between the pharaohs of Egypt and the ancient Levantine kingdoms

c. 400 B.C.:      Marketplaces exist in Greece and Rome

c. 1200:      The Reformation begins in Europe

1776:      Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations is published

c. 1800:      Industrial Revolution begins in Europe

1929:      Great Depression begins

1933:      The New Deal begins

1935:      The Social Security Act is passed.

1936:      John Maynard Keynes' The General Theory of Employment, Interest and Money is published

1947:      The Taft–Hartley Act is passed

1956:      For the first time in world history, the number of people performing services is greater than the number producing goods

1989:      The Berlin Wall falls. Germany is reunified and becomes an important economic power.

St. Thomas Aquinas St. Thomas Aquinas (1226– 1274), one of the most important writers and theorists of the Middle Ages, believed in individuality more than his predecessors. The Reformation was beginning. The Catholic Church was very powerful and equally corrupt. People wanted change and were calling for reform. His economic notions accompanied a new wave of thinking that remained until the Mercantilist time in 1600. Aquinas thought that it was natural for men to hold private property. He argued that there were three reasons for this to be the case, rather than public ownership. His first point was that men will more reliably attempt to secure something for themselves than they would for the public use. Secondly, people conduct themselves more orderly and responsibly when it concerns their personal effects and properties. Thirdly, if everyone is happy with his own lot that he's gotten for himself, peace will ensue much more securely than it would were everyone sharing and feeling, possibly, a lack given their inability to have power over their acquisitions.

St. Thomas Aquinas also argued that when things are in private hands they are easier to share with those who have less. He thought that private property was just and advantageous, provided it was shared with those who didn't have it. This belief made it acceptable for men to be richer than others and to separate their wealth. It became acceptable and even respectable to have things. Aquinas even said that there should be a limit to the amount that any one person should have to give to the poor so as to ensure that one may live as necessary for one's status. He thought that wealth was wonderful if it helped one to live a virtuous life. He also felt that poverty was equally desirable if it was the lack of wealth that helped one to live virtuously. His idea that it was natural for men to have different status levels in life was new, and allowed an individualistic branch of thought to take root.

Aquinas also wrote about more detailed economic ideas. The clergy writers who preceded him had written that a "just" price was that at which the buyer and seller benefited equally. Aquinas said that the "just" price was actually a price range, within which both parties would benefit but allowing for external details to be included in price. He said when figuring the price of an item, the seller should take into account his amount of loss. For example, if the seller had a personal attachment to something that he was going to sell, he could charge more than expected for it for this reason. This opened the door to a lot of subjective reasoning, a door which is still open.

Aquinas' ideas about wages were based on the same principles. A worker's wage should be enough to allow him to live decently without raising the cost of labor enough to raise the price past a "just" level. The cost of labor was very important in determining an object's cost. Aquinas' ideas have become widely used in price determination.


Aquinas touched on money lending as well. He anticipated the idea of interest payments by stating that if a lender could prove that he had missed another financial opportunity because he hadn't had the money that he had lent to someone else, he could charge interest rates for the money that he had lent. He could also charge interest if the borrower was late in his repayment, and he could charge a compensation fee if he could show that he had suffered a loss of some kind.

St. Thomas Aquinas also wrote about the state's needs. He said that in order for a state to have what it needed, it could either produce everything for itself or it could trade. To trade, he realized that merchants were needed and this paved the way for exploration through searches for trading partners and resource suppliers. It was only two hundred years after St. Thomas Aquinas' death that Christopher Columbus set sail to the Indies.

During this same period (roughly 1215 to 1545), the Reformation was gathering speed. Europe went through many artistic, political and social changes resulting from opposition to the Catholic Church. The Church had become very powerful and very corrupt. The official Reformation began in 1517 when Martin Luther, a German Augustinian friar, posted his "Ninety–Five Theses," a list of criticisms against the Catholic Church. People began to take charge of their own salvation since they couldn't trust the Church. Individualism swelled.

Aquinas' ideas took hold and mercantilism was back with a passion in 1500 with continued popularity until the 1700s. The main belief was that a nation's wealth could be expanded upon by exporting products which would bring in gold and silver. This monetary wealth could then be used to build up armies and armadas; the more gold one had, the more one could buy with it. It was this desire for gold that led to exploration on a global scale.

Further developments As an economic system, capitalism has had more recent success. The system's development dates from the 1500s as the areas of mercantilist activity in Europe began to spread. The English clothing industry led a movement toward capitalism in the 16th, 17th, and 18th centuries. People began to realize that they could produce goods and sell them to gain a profit.

In the 16th century, the Protestant Reformation furthered the ideas of individualism. The distaste for material acquisition decreased as the desire to attain went up. Frugal behavior and hard work gained status, and the differences in distributions of wealth began to be justified by the idea that one earned as much as one deserved with the fruits of his labor.

Though there were many details of mercantilism that the philosophers and economists of the day did not agree upon, there were a few essentials that were universally accepted. All of the resources needed for the production of goods were to be created within the host country. If this proved impossible, then only the raw materials would be imported to allow the production to take place domestically. To further the political and economic benefit to a nation, the maximum amount of effort would take place within the borders rather than outside where added payment would be necessary.

Because of the state's desire to provide for itself all of the needed materials both to exist and to export, colonization became increasingly attractive. Colonies could provide free resources for the colonizing country. The colonizer wouldn't have to pay for them from another independent source. Exploration became more than just a search for trading partners; it became a chance to find new areas to exploit and claim for one's own state.

Another effect of mercantilism was the improvement of technology and the need for mathematicians and engineers. In order to travel more successfully than the competitors, a nation needed more advanced navigational equipment. States began to create areas of study for cartographers and mathematicians. In addition to navigational equipment, weapons were improved to facilitate colonial take over. There grew an interdependence of mutual benefit between the state and the merchants, without the state controlling the actions of the merchants and their markets or the markets controlling the actions of the state. Thus, the seeds of capitalistic separation of state and market were planted.

Decline Mercantilism as an idea began to drop in popularity as inflation rose. Given that the more gold a country has decreases the value of all of it, the acquisition of new gold did not necessarily create greater wealth. Since the value is lower, the prices increase. When these now more expensive goods are exported, they are rejected for the cheaper ones available from the other trading partners. This was perhaps best evidenced by the decline of the Spanish Empire, where inflation quadrupled prices in a century due to massive gold intake.

Mercantilism also declined because people began to feel that they were not being provided for adequately by the state. They wanted the state to withdraw further from their lives rather than remaining on top of them and, consequently, stifling their activities. People began to suspect that individual interests led to communal gain for many of the same reasons stated by St. Thomas Aquinas hundreds of years before.

The Rise of Individuality

From mercantilism until the time of Adam Smith (1723–1790), the founder of capitalistic theory, individuality continued to grow. The English philosopher John Locke (1632–1704) believed that a man's place in society was not necessarily a struggle against his neighbors. He disagreed with Plato that private property would necessarily create enemies. Locke claimed that people are born with equality and freedom, and if this turns competitive and ugly, it is because of their actions. Governments form to ensure peace and freedom between people. This creates the possibility of economic freedom that is unregulated by the state, provided one does not harm one's neighbor, people are at liberty to do as they please.

Locke felt that the government had no place in the economic sector. He also believed in private ownership. He believed that the world was created by God to be used by the people and that once one had labored to some end, the end was his to claim. If a man cultivated a field, the products from the cultivation were his. Locke went further to explain the use of money as a substitution for direct labor. He said that men have agreed to money as a means of exchange. Money is paid for something that one man has that another wants. If a man cultivates a field and has more than he needs for himself, since the products are his because he produced them, he may sell them to someone who has need for those products. This exchange allows the producer to earn money he can then use to buy goods he himself is not able to produce.

Locke said that men should be allowed to regulate their own commerce. Governments should exist only to protect people from injustice against the state and against the people, whether from outside sources or from threats within their borders. Locke also explained why some members of society were able to amass such a state of wealth; it was through their own labor that they were able to make enough to sell and, consequently, gather their money.

The Reformation also claimed that people were responsible for themselves and that if they did not reach salvation they had only themselves to blame. People did not necessarily have to go to the Catholic Church in order to have a relationship with God. Everyone was his own priest. These ideas became dominant in the Western world as feudalism collapsed. Much of the production was privately owned and markets began to dictate product and income distribution.

In addition to the mercantilist beginnings and the individualism of the Reformation, Europe's increase of its supply of precious metals sparked a rise of capitalism. Prices inflated because of the supply, though wages did not rise at the same rate. The capitalists benefited greatly from this inflation. They also benefited from the increase of national states which occurred during the mercantilist era. The national policies created legal codes and a regulated monetary system which were necessary social conditions in order for the economic development to be such that a shift would result from public to private ownership and control.

Adam Smith

As time went on, industry began to take the place of commerce. In the 18th century in England, the capital that had been building for centuries was used to develop technology. This in turn fueled the Industrial Revolution. Adam Smith (1723–1790), an early theorist of capitalism, wrote his book An Inquiry into the Nature and Causes of the Wealth of Nations in 1776 which, though not immediately a success, became the first publication having to do with capitalistic theory. Smith recommended allowing the market to make economic decisions through self–regulation rather than allowing the government to control commerce and industry.


The main idea of his book was that there is a natural progression through four stages that humans follow, from the crude caveman to more organized agriculture, then to feudal farming and finally to capitalistic independence and commercial wealth. He explained the evolution of society into a market–determined existence free from government interference. Smith called this the system of perfect liberty. He wrote that "Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all." This phenomenon and the end result later became known as laissez–faire capitalism.

Smith also talked about the invisible hand, which works within the final stage of society. A system of complete freedom, given the drive and intellect of human kind, will create an organized society. He explained this with examples of individual commodity pricing and a regulated legal code. This order would be produced by the two pieces of human nature, the passionate and the impartial. The passions would keep morality up front while the sensibility and apathy would promote organization and cleanliness. Smith argued that competition would result from the marriage of these two bits of human nature. The passion and drive to improve one's condition and the sensibility to do it by trying to get the market to work in one's favor leads to a competitive arena.

According to Smith, the invisible hand regulates the economy through this competitive fight for self–improvement. Competition for consumer demand drives the prices down to levels that Smith deemed natural. These prices would be just about the cost of production; enough to make a profit and low enough to be affordable. Smith also theorized that competition creates frugality and efficiency. For the same reason that prices are kept at natural levels, Smith argued that so too will wages, profits, and rents.

Smith's arguments for laissez–faire market freedom were as much against monopoly as they are against government. He wrote that competition is essential and he sited the dangers of a monopoly. In addition to that, though he spoke of a capitalistic ideal, he often referred to the actions of the capitalists with contempt and scorn. He did not necessarily approve of the nature of the system, but rather pointed out the benefits that make it so appealing. He also stated that the division of labor reduced the laborer to a robotic being, as he "becomes as stupid and ignorant as it is possible for a human being to become."

A good portion of The Wealth of Nations centered around the idea of natural liberty. He points out that this system cannot work with the interference of government. He says that "the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind" cannot affect the government's actions. If the government heeds the market and reacts to it, all will go sour.

Smith's Wealth of Nations also spent a good deal of time analyzing economic growth. Smith thought that the market was self–repairing. Not only did he believe the market would adjust to the economy around it, he also thought that with a free market the national affluence would continually rise.

The backbone of his theory rests with the idea of the division of labor. The book begins with a passage describing a pin factory. Ten people could produce 48,000 pins a day because of the division of labor; if each were producing the entire pin himself, each worker could only produce a few pins a day. This division of labor can only occur, Smith said, after the acquisition of capital. This capital is in the form of machines and tools, and also includes the resulting profits used to pay the workers.

BIOGRAPHY:

Adam Smith

Adam Smith is known mainly for his book An Inquiry into the nature and causes of the Wealth of Nations written in 1776. Born in Kirkcaldy, Scotland on June 5, 1723, he lived a scholarly life in Scotland, England, and France. He was born to Margaret Douglas and Adam Smith. He went to elementary school in Kirkcaldy and was said to have been carried off by gypsies when he was four, tracked down by his family and then abandoned by the gypsies.

When Smith was 14, he began study at the University of Glasgow. He graduated three years later, having studied moral philosophy and economics. He then won a scholarship to Oxford. He spent several years there in relative isolation learning more about classical and contemporary philosophy.

After he'd finished his schooling, he gave several lectures in Edinburgh which publicized his name and his studies. In 1751 he began to teach logic at the University of Glasgow and, later, moral philosophy. He was elected dean of the faculty in 1758. He published his first work, The Theory of Moral Sentiments, the next year. This work was the foundation for his later book, The Wealth of Nations.

In 1763, Smith left the university to tutor a young duke in France. He spent four years with the Townshend family and, when he left in 1767, he had the beginnings for his book. He spent the following nine years finishing the manuscript and The Wealth of Nations was published in 1776.

There is some debate as to whether or not the book was an immediate success. Smith went into semi–retirement after its publication and became the commissioner of customs and salt duties for Scotland. He never married and, as was the custom in respect for privacy, many of his files were destroyed when he died in 1790. Whether or not he knew the importance of his theory, his ideology became reality.

This dramatically improved production has results of its own. Since there is so much being produced, the manufacturer begins to build stock and therefore needs more workers to continue this trend. To attract them, he raises the wage offer. When he hires the workers, he ends up making a smaller profit proportionally. To counteract this, the employer may come up with a more intricate system of labor division in order to continually maximize profits. Smith's growth predictions did not depend solely on human nature. They also included the necessary lack of government intervention and regulation which would temper the competition, thereby keeping everything as equal as it could be.

Other Influences

The French Revolution and the Napoleonic Wars effectively dissolved the remaining remnants of feudalism. Smith's ideas were increasingly put into practice. In the 19th century, politics were liberal and began to include the gold standard, free trade, relief for the poor and balanced budgets.

Charles Darwin published his Origin of the Species in 1859. His ideas were directed toward science rather than toward economics, but were similar to capitalistic ideology. Darwin described the process of natural selection that occurs in evolution. Those who are able to adapt survive while those who cannot will expire. This idea was shared by capitalists. Those best adapted to their environment and market were the most likely to survive and make a profit. Though Darwin didn't suggest or subscribe to the idea of social Darwinism, it became a way to explain why certain groups were less affluent than others; they simply hadn't adapted as well as the upper class. This carried on to economics as well and, though Darwin never actually said "survival of the fittest," the phrase became an accepted explanation of the distribution of wealth in the economy.

World War I, spanning the years 1914 to 1918, was another important time in the history of capitalism. When the war was over, the gold standard was discarded and replaced with separate national currencies. The banking hegemony switched from Europe to the United States, and the barriers to trade grew as the international markets shrank. In the 1930s, the Great Depression ended the laissez–faire (hands–off) policy of governments toward economy in many countries. These events cast a shadow on capitalism and people wondered if it could succeed as a system.

Despite these obstacles, capitalism has survived and continued to flourish in the United States, the United Kingdom, Germany, and Japan. It is beginning to gain stature in many other countries as well, and much of the first world subscribes to its belief in freedom from government control of the economy.

THEORY IN DEPTH

The two main ingredients of a capitalist society are the capitalists and the laborers. The capitalists are the people who are in control of the capital, or means of production. They cannot reach their end without productive labor, however, which brings in the rest of society. The human labor needed to produce goods from raw materials is paid labor. People work for money rather than for a part of the product. The workers are not invested in the product and are more detached than if they were receiving goods rather than wages. The work becomes more efficient because of the division of labor. Each worker has a specific job to do and may become very adept at it since his area of expertise is relatively small. This lowers the value of the individual worker, however, since his area of expertise is so specific.

Factors for a Capitalist Society

Individualism One of the most important traits of capitalism is individualism. Individuals, rather than the state, own the means of production such as land, machinery, natural resources and factories. Public ownership is possible, such as with the postal service and public utilities, but it is the exception rather than the rule. The state may own land as well. In the United States, for example, the government owns roughly one third of all land, mainly in the West and in Alaska.

This bias toward individualism is based on two things. First, ownership of production means having control over people's lives, and it is preferable to have this power spread out amongst many players rather than concentrated in bulk with the government. The capitalists themselves may be regulated by the government, which provides added protection for the consumers and capitalists alike. If the government were in control of the capital, there would not be a second power to curb its actions. The second argument for individualism is that progress is more easily attained when people have personal incentives to reach their goals and the freedom to set the goals in the first place.

Market economy Another trait of capitalism is the market economy. Before capitalism, families were more self–sufficient they produced what they needed to exist, with any extras being bartered for any supplies they themselves could not produce. This was a sort of primitive market on a small scale. Families bartered with other families in their locality. There was no division of labor because the families took care of all of their needs themselves. In contrast to the time when these families generally produced everything for themselves, the capitalist system ensured that no one would have to master so many different tasks. In capitalism, each person specializes in one task.

Each person creates and supplies only a small portion of what they need to live, relying on others to produce what else they need. Wages earned from this labor goes toward the purchase of other necessities. Because of this difference in direction, a worker produces not for himself but for the market. Supply and demand determine the prices paid for the goods produced. The government may regulate to some extent; in the United States, the government intervenes to break up monopolies, promoting competition and lowering prices.

Decentralization In contrast with other systems that are dictated by a central body that attempts to keep up with the economic and social intricacies, capitalism is broken into so many different pieces that, in theory, each piece is expertly managed by the person in charge of that slice of the pie.

This lack of central regulation is a very important ingredient of capitalism. The state does not tell people where and when to work, how much to charge for their labor, what to do with their money, and what they should be producing at their job. The government may direct the market subtly with its budget, interest rates, and taxes, and it may break monopolies into smaller pieces. However, the direct economic control remains in the hands of the masses and the government serves only as a referee to promote fair play in the game.

MAJOR WRITINGS:

Wealth of Nations

The first major writing in the field of capitalism was Adam Smith's The Wealth of Nations in 1776. The main topic that Smith tries to resolve in his book is the problem of the struggle between the passionate side and the impartial side in man. Smith describes the four stages that a society will go through, unless blocked or altered by war, lack of resources, or poor government. The first stage is hunting, followed by nomadic agriculture, feudal farming, and finally, commercial interdependence.

Each stage is accompanied by whatever institutions are needed. The hunter stage, for example, does not include ownership of property and does therefore not need an intricate law code to protect property. Tradition–bound peoples solve their economic problems by migrating to adapt to seasons and climate, supporting themselves by gathering, hunting, and farming. With nomadic farming, social organization becomes more complicated. Rules are needed to distinguish between goods and a primitive form of law and order begins.

Though The Wealth of Nations was immediately championed by Smith's friends and colleagues, there is a debate as to whether or not it was quickly accepted by society as a whole. Whatever the case, Smith was the first to write a book so completely dedicated to the idea of capitalism:

The whole annual produce of the land and labour of every country, or what comes to the same thing, the whole price of that annual produce, naturally divides itself, it has already been observed, into three parts; the rent of the land, the wages of the labour, and the profits of the stock; and constitutes a revenue to three different orders of people; to those who live by rent, to those who live by wages, and to those who live by profit. These are the three great, original and constituent orders of every civilized society, from whose revenue that of every other order is ultimately derived. (Book One, Chapter X).

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate. In the observation or relect of this maxim consists, what is called the equality or inequality of taxation. (Book Five, Chapter II).

Smith wrote his work before the Industrial Revolution and made no mention of its possible arrival. Some of his feelings and predictions may have been different if he had imagined the industry waiting in the wings and the progression from an industrial economy to a service economy that was to occur.

Links between supply and demand Another feature of capitalism is the sovereignty enjoyed by the consumer. He chooses both what will be produced and how much of it will be available through his demand or lack thereof. The number of televisions produced, for example, is not a result of a government limit or quota but rather a direct result of how many televisions sold the year before and whether or not there was a surplus or a shortage. The government may increase interest rates to discourage borrowing for the purpose of business expansion, but the decision is ultimately up to the capitalist who is willing, or unwilling, to pay the price. United States President Richard Nixon (1913–1994), for example, set wage and price controls in his economic policy of 1971. He did not, however, forbid action of any kind; he encouraged the market to act in ways better for the consumer. Thus, the government may protect the consumer by creating standards for wages or by encouraging competition when a monopoly has formed.

Competition Competition is another essential aspect of capitalism. Competition means that it is the interactions between the buyers and sellers that determines the price of goods and services rather than the state or a private monopoly. Research, for example, has become one of the largest competitive arenas. By performing research today, companies can anticipate the goods and services consumers will desire in the future. Research has become a very competitive area; when one company researches and then produces a product first, all of its competitors who were working on similar products have lost out. Their goal has been realized by someone else and all of the resources they have expended to that end have been, relatively speaking, wasted. For example, as soon as someone designs a smaller cell phone, the others working on a similar project must then think of something else to design. Competition creates fervent researchers. Research fuels competition not only between companies, but between entire economies. In the 1970s the United States began to relax its research endeavors both publicly and privately. Japan and Germany have since grown enormously in strength due to their research, taking part of the success away from the United States.

Profit Another principle idea of capitalism is profit. A special level of freedom is created in capitalism that is not found in other systems. It guarantees freedom in several important areas: contract, property, trade, and occupation. In contrast, when prices are established by the state, there is a limited amount of profit to be made and, therefore, less incentive to enter the market.

Capitalism is a system based on profits and, consequently, on losses. When one person, company, or state makes an enormous profit, there is always someone who has lost out. In any given year, forty percent of corporations will report losses. Fifty percent of firms close down within two years of opening, and eighty percent close within ten years of opening. The closures are usually due to continual financial losses.

THEORY IN ACTION

There are many examples of capitalism. Germany, the United States, and Japan are countries where capitalism is the driving economic force but which are, at the same time, very different from one another. While Japan is more specifically designed like itself, both the United States and Germany are universalistic. Germany is community oriented and the United States revolves around individualism. The United States is analytical and Germany integrative.

Before World War II, which lasted from 1939 to 1945, the capitalist economies were plagued by dips and swings, depressions and peaks. There has been a huge change since the Great Depression of the 1930s, however. Welfare policies and available aid have curbed the slumps. The economy has also changed from an industrial economy to a service economy which has created greater stability in supply, demand, and in the job market.

Capitalism in practice was very much like capitalism in theory through the mid–nineteenth century until the Great Depression. One thing that has happened is a change in proportion of the population in the labor force. With technological development, under capitalism or any other economic system, the industrial working class increases constantly at the expense of the tradesmen: carpenters, blacksmiths, bakers, and plumbers, for example. These potential tradesmen choose jobs in factories instead. As time progresses in industrial development, however, the numbers working in industry begin to go down again in proportion to the population. Their absolute numbers keep growing, but proportionally the numbers are shrinking.

The United States

Since the advent of the twentieth century, the technological working class in the United States has consistently grown while the proportion of people working in industry has steadily gone down. This has occurred for two reasons. The first reason is the switch from blue collar work to white collar work. There has been a steady shift as technology increases. Automation and machinery do the work that the blue collar workers used to do. There are more white collar


workers needed to manage the technology, but the overall number of workers goes down.

Rise of the service economy The second reason for the steady decline in workers proportional to the population is the growth of companies to provide service rather than goods. From 1950 to 1985, the number of people employed more than doubled from 60 million. The number of white collar workers rose from 22 to 53 million. The new white collar workers were employed in government, retail and wholesale trade, schools, insurance, communications, entertainment, health services, finance, and real estate. Government in particular has grown enormously.

The change from producing goods to providing services has led to a shift in the nature of most employment. In 1950, more than half of the labor force was blue collar. Today, white collar workers outnumber blue collar workers by more than two to one. The production line has given way to the office and the product has become a service. This is called the service economy to prevent confusion with the industrial economy that it replaced.

The two–tier labor market has largely been created by the advent of improved technology which separates white collar and blue collar workers more distinctly. Generally speaking, blue collar workers lack the education, pay raises, health insurance and other benefits that common in the white collar sector. In fact, since 1975, the majority of the household income gains have gone to the upper 20 percent. From 1994 to 1999, inflation was low and unemployment fell to below 5 percent. In 2001, the economy moved into a downswing, however, and the long term troubles with a lack of economic investment, medical cost increases with the aging population, trade deficits, and family income stagnation for the lower income families became problematic.

An important year in American capitalism history related to the rise in the service economy was 1956. For the first time in world history, the number of people performing services was greater than the number producing goods. The same change has since occurred in Sweden, Great Britain, and Canada. This switch has been significant politically because the salaried members of society identify more strongly with the upper and middle classes than with the working class. This white collar group generally produces children who continue in this social stature. The new members of society are better educated and more wealthy than their blue collar counterparts, and because of this, they're better suited to remain in that position.

In comparison, Russia saw a huge increase in industrial workers, both skilled and unskilled. As its industrialism increased, however, the same phenomenon occurred and there were increasing numbers of white collar members of society. Class lines have become defined despite the communist ideology. The social status of the blue collar worker is distinctly different than that of the white collar worker. These new upper classes are rising at the expense of the lower. In communism as well as capitalism, industrialism breeds this shift in the populous.

The new service economy has greatly affected the strength of the capitalist economies. In a goods– producing sector of the economy there are large shifts of employment and of demand. When there is excess supply, it can usually be stockpiled and the surplus saved. With the service economy, however, the services cannot be saved if there is a surplus in supply. There is necessarily a better balance between supply and demand for this reason and this in turn creates a more reliable and predictable job market.

In countries that practice capitalism, the economic levels are high enough to allow for welfare policies and payment. With other economic systems, however, though there are often welfare policies existing in theory, there is often not enough money to pay for them and they become obsolete. Under capitalism the constant increase of goods and services allows for enough wealth to be able to be distributed to the people who are struggling. Since the market is permitted to adjust to itself and is in control of all of its own intricacies, it is able to be much more efficient than if the state tried to regulate all of the details.

It is interesting to note, however, that despite the success of capitalism and the relative economic boom in the United States, there is still a poverty problem and an uneven distribution of wealth. Many people are in debt, and the United States itself has a huge debt to repay to its lenders.

Non–Profits Another change in the structure of capitalism has been the increase in the non–profit sector. In the United States, the non–profit sector is made up of private not–for–profit organizations and the government. This section of the economy is growing at a faster rate than the for–profit sector in the United States. Non–profit means that there is a direct, or indirect, contribution back to society. Since the non–profit sector doesn't invest their earnings in themselves, what would have been profit goes back into circulation.

The non–profit sector has grown for several reasons. The government has continued to expand in the areas of defense, health, education and welfare. Private non–profits have also grown in both health and education. The service economy has helped the non–profit growth as well. As the industrial economy advances and grows, a service economy slowly replaces the industrial economy. When this happens, the production of goods is replaced by services for both for profits and non–profits, such as health, community, welfare and education services.

Finally, as a nation's economy advances and evolves, there is a greater demand for provision of services that not everyone is getting. Health insurance, educational aid and transportation are considered essential but unobtainable. More socialist governments like those in Scandinavia and Britain have concentrated their socialization programs on service areas like health and education rather than controlling economic activity.

The government steps in There have been many successes with capitalism, but there have also been many problems as well. Capitalism has not always gone according to the theory. The Great Depression was an unexpected event. It was responsible for the welfare system which has come to characterize so many capitalist countries, including the United States, Canada, the United Kingdom, and much of mainland Europe. The population believed that laissez–faire economics was ideal and that even when the market plunged it would be able to fix itself again without outside influence. When the economy dipped to the point where one quarter of the population was out of work, enterprises were going bankrupt and couldn't pay their employees, and farmers couldn't sell their products without taking a loss, something had to give. The welfare state was created. While not an entirely natural step in the progression of capitalism, it became necessary for the crippled economy.

U.S. President Franklin Roosevelt began the New Deal in 1933. It outlined emergency measures to help people back onto their feet after the Great Depression. The Agricultural Act (May 12, 1933) provided aid for farmers in return for lowered production, thus raising prices due to a decrease in supply. This allowed them to buy the industrial products to which they had become accustomed.

BIOGRAPHY:

Franklin Delano Roosevelt

Franklin Delano Roosevelt was born on January 30, 1882 at Hyde Park, New York. He was the only son of James and Sara Roosevelt. Under the guidance of his mother, Roosevelt received a private education until the age of 14, when he left home to attend Groton. After completing Groton, Roosevelt attended Harvard, where he majored in history and political science.

During his college years, Roosevelt courted his distant cousin Eleanor Roosevelt, and they married on March 17, 1905. He enrolled in Columbia University's law school, passed the bar after a little more than two years of study, and joined a noted law firm. Roosevelt was elected to the state legislature in 1910.

In August 1921, Roosevelt's world was changed forever. While vacationing at his island retreat off the coast of Maine, he was stricken with polio. Roosevelt survived the near–fatal attack, but was paralyzed from the waist down for the rest of his life. Roosevelt didn't let his condition get him down. He continued to devote his time to his law practice, his hobbies, and some business ventures. He returned to politics at the end of the 1920s, when he was elected governor of New York in 1928. He served two terms as governor.

During Roosevelt's second term, he dealt with effects of the Depression that had hit New York. Along with a group of advisors, he devised a program that was in many ways similar to the New Deal. The plan included unemployment relief, farm relief, old–age pension, tax increases, and various other reforms. The roots of the New Deal were a big part of his campaign for the presidency in 1932. Roosevelt won the election, and shortly after his inauguration on March 4, 1933, the New Deal became reality. His plan included regulation of credit and currency, reduction of federal salaries, the allocation of grants to cities and states for relief purposes, agricultural subsidies, and regulation of the stock market. Roosevelt regarded the National Industrial Recovery Act (NIRA) of 1933 as the key to the entire program. The purpose of the act was twofold. It devised codes of fair competition in industry and it also guaranteed labor the right to organize and bargain collectively. Unemployment relief came in the form of various work relief agencies.

After 1935, the most important legislation of the New Deal was focused in the area of reform. The National Labor Relations Act was passed by Congress on July 5, 1935. It guaranteed the right of workers to organize and bargain with their employers. On August 14 of that same year, the Social Security Act, which provided old–age retirement payments and benefits for widows, orphans, and the needy, was passed. The Fair Labor Standards Act of 1938 was the final achievement of Roosevelt's New Deal; it set a federal minimum wage and outlawed child labor.

After 1938, foreign affairs became the focus of the Roosevelt administration as the threat of war loomed in Europe and the Far East. Roosevelt, despite protests from the majority of Americans and Congress, involved the United States in the growing war. Roosevelt's involvement in the Allied effort was crucial. He worked on strategic negotiations with the Allied leaders and pursued his dreams of a United Nations.

Sadly, Roosevelt would not survive to see the war end or the implementation of the United Nations. He died from a massive cerebral hemorrhage while on vacation on April 12, 1945. After four terms as President, Roosevelt had successfully realized the social and economic reforms of the New Deal.

The National Labor Relations Act (July 5, 1935), also known as the Wagner Act, changed the nature of relations between employers and employees. Before the act, employers had been at liberty to recognize, or to ignore, unions in their midst. They often fired workers ers for being involved in union activities and the workers had no means of protection from this. The Wagner Act promoted bargaining between the unions and the employers. It could not force the two sides to agree, but it prohibited both strikes and lockouts, the scare tactics of both sides. The result was a distinct decline in violent labor disputes.

The Social Security Act (August 14, 1935) was another major step in the welfare system's creation. Private efforts to protect individuals from poverty in old age had proved largely ineffective and the Social Security Act sought to create a public provision for everyone through taxation of wages. This act was of particular importance because it showed the United States' belief that it was partly responsible for the monetary security of its citizens.

In 1947, The Labor–Management Relations Act, also known as the Taft–Hartley Act, replaced the Wagner Act. Some provisions of the Wagner Act were altered for the Taft–Hartley Act, but the principle upon which it was founded, bargaining between the two sides, remained unchanged.

In 1965, Congress took the Social Security Act even further to include health care for people over the age of 65. The health insurance covered both doctors' bills and hospitalization. Medicare, the insurance program, existed for senior citizens, but the government also gave grants to the states to provide aid to families unable to cover their medical costs. Many states followed suit by setting up Medicaid, programs set up to deal with federal grants and distribution of money to the families it was designed to reach.

The Elementary and Secondary Education Act in 1965 was another important step. The government made grants directly to school districts with families with low incomes. The Higher Education Act from that same year gave both grants and loans to institutions to improve their facilities. It also gave aid to millions of students in the form of federal loans, federally guaranteed private loans, work–study aid, and grants for students with disadvantages.

The main mechanism for funding the social welfare systems is taxation. Through federal taxation the income is more evenly distributed than it would be if the economy was entirely laissez–faire. This distribution of wealth has led to a higher minimum allowance for many. This allows a greater proportion of the population to remain active economic players which ultimately keeps the economy more stable than it would be if the wealth were more distinctly separated. Government taxation is structured to compensate for economic dips and swings. The government has stores of money from taxation from which to continue its welfare programs regardless of the state's economy. Through social welfare, the government is able to retain relative stability.

The debate over public vs. private With his New Deal, Roosevelt essentially changed the relationship between the public and private sectors. He supported farmers and farm prices, protected unions, created a social security system for the elderly and retired, gave aid to the unemployed, and regulated the market. His advocates called him a savior, while his opposition labeled him a traitor.

Initially, everyone seemed in favor of the welfare state in the United States. President Lyndon Johnson (1908–1973) proposed "the Great Society" to this end. This trend continued with Democrats and Republicans alike. The conservatives tried to buff up the existing programs, and President Nixon did just this with welfare and education. With his "New Economic Policy," Nixon also set up price and wage controls.

After 1970, however, attacks on the welfare system became more direct and biting. As time went on, opposition of the welfare system grew. Support and dissent split onto different sides of the fence. Liberals argued that the government should be expanded even further, wrapping its protective, paternal arms even more tightly around its citizens. Two important political changes occurred in the Western world. Margaret Thatcher was elected as the Conservative Prime Minister of Great Britain in 1979, and Ronald Reagan (born 1911) was elected as the Republican President of the United States the next year. Both administrations held strong opposition to the welfare state. Policy shifted and challenged the existing system. Margaret Thatcher privatized even more of Britain's functions including the post office, and she became known as "Maggie Thatcher, the milk snatcher" for revoking free school lunches.

The conservatives had several gripes. They emphasized decentralization of the government, deregulation of the economy and privatization of public entities. After Adam Smith in 1776, capitalism promised free market growth uninhibited by government regulation. The economic advances were coupled with problems, however, such as monopolies, swings of booms and recessions that affected the economy's growth, disregard for the environment by the companies producing waste, and an uneven distribution of wealth, which left many without the means to provide health care, retirement funds and other needs for themselves. These troubles led to government aid and action. Governments began regulating the economy and disbanding monopolies, providing social welfare through taxation, and creating restrictions and guidelines for company waste production.

The conservatives believed that the market economy would correct itself and that government should step back. Distribution of wealth would be unchecked, branches of the government such as the U.S. Environmental Protection Agency wouldn't be able to monitor and control emissions of various kinds and people would be entirely responsible for their own livelihood. The conservatives believed that the economic differences are justified; people reap what they sow and create their own wealth or their own poverty.

The decentralization of government is another concern of the conservative opposition. They argue that national policies are less effective than local policies because the localities are better suited to address specific needs. A national minimum wage, for example, ignores the differences in cost of living between New York City and rural Wisconsin. The concentration of power also means more bureaucrats in the capital, which raises the cost of running the government, which in turn raises taxes. As economies encounter problems, the trend is to deal with them on a national scale if they are affecting the entire country. The right wing feels this is a poor remedy, however, and argues that government should be broken up into smaller bits and pieces.

They also contend that the conditions that spurred much of the governmental growth and attention to social welfare are different than they were when the changes occurred. The Great Depression was seventy years ago. There was an economic crisis. John Maynard Keynes' (1883–1946) ideas of necessary government aid were adopted and Franklin Delano Roosevelt's New Deal began a wave of change. There are problems with social welfare; the people meant to receive the aid don't always get it.

Another contention is the belief in the need for privatization of public functions. The United Kingdom did a lot of privatization under Margaret Thatcher, but the United States has shown more resistance and continues to have many large public arenas. Liberals advocate public welfare for the poor while conservatives want taxes lowered and programs cancelled. The right wing feels that public functions do not operate under market pressures and have no drive to be efficient and successful. The same argument goes for social welfare; the conservative viewpoint is that the allocation of aid prevents self–help and, through apathetic acceptance, promotes long–term poverty and complacency.

The conservatives also feel that the publicity of functions deters the freedom of those functions. Churches, schools, and museums should be private to protect their individuality. In regard to schools, both the United States and United Kingdom have the option of state funded or privately funded schooling.

There are now two sides of the fence. Views on capitalism have split with the liberals on the left, the conservatives on the right, and many stages in between the two. The liberals support increased government spending and centralization, social welfare and national regulation of the economy. The conservatives want to decrease the size and budget of the federal government, distribute power on a local level, and leave the market to its own devices.

Today, the United States has, arguably, the most diverse and technologically powerful economy in the world with a per capita gross domestic product of $33,900. Private individuals and businesses make the economic decisions with little guidance from the state and the government spends an large sums buying its supplies from private American corporations. Business firms in the United States have much greater freedom to make their own decisions than do their competitors in Japan and Western Europe. They may expand capital, lay off large numbers of workers, and create new products. They do, however, face more obstacles in exporting their goods than do outside firms when exporting to the United States. U.S. firms are technologically competitive and are leaders in computing, aerospace, military equipment and medicine. The technological advantage has continued to narrow since the end of World War II, however.

Germany

The German model of capitalism is somewhat different from that of its Western siblings. Because of the discrepancy between the United States, Britain, and France's definition of democracy and that of the Soviet Union, when the Allies invaded Germany and set up democracy after World War II, there was some debate over which model to install.

Both "democracy" and "capitalism" are ambiguous words and have different meanings for different people and for different countries. The United States, Britain and France have a different meaning of democracy then do the Soviets and Chinese. The former associate democracy with freedom of press and speech, free elections, equality, the right to choose one's job and to criticize the government, the right to travel within one's country as well as internationally, and the right to create trade unions to protects one's rights in the work place. Russia and China, however, consider that version the formal definition. In their view, democracy under communism is the true democracy, with freedom of everything with certain provisions; freedom of speech so long as it is in favor of communist theory and freedom of the press provided the writing is in favor of the government. To clarify, it seems that capitalism and the democracy favored by the Western world go in tandem.

This western view of democracy includes several themes which are used as a basis for reality, whether or not it lives up to them. Individualism, rationality, voluntary choice, the law, means, consent, and equality are the standards behind the democratic machine. The government is by and of the people.

After World War II, the two definitions caused trouble within the Allied Powers. What resulted was the split of Germany down the middle. West Germany was set up with a western idea of democracy and East Germany with that of the Soviets and communism. Since the Berlin Wall came down in 1989, the two halves of Germany reunified, and Germany has emerged as an economic leader with stability that is envied.

Germany has become a model for much of the European Union's development. Like the European Union, Germany's states unified through the Zollverein, the customs union, before there was political unity. The German bank, separate from the woes of politics, is a model for the economics of the European Union. The state and private corporations create business regulations together in a way which would not be possible in the United States due to the individualistic attitude. Germany is more community oriented than the United States. Decisions are made at levels of interaction between the labor, industrial, government, and financial groups.

The German system is almost a merger between the democratic and communist ideals that split the country for so long. Though its politics are not utopian, its economics are almost that. West Germany was able to attain the same Gross National Product (GNP) that she had before World War II by 1950, just five years after the installation of democracy. Germany has trade surpluses today and is in a good position to buffer the collapse of the communist states which border it.

As the United States and Russia distance themselves from Europe, Germany fills the void. Companies like Volkswagen are able to expand, provide more jobs, and produce more cars in order to meet increasing demand. Germany has come from behind and may be winning the race.

Historically, Germany got a late start, about thirty–five years after the United States and seventy–five years after Great Britain. Though the states had begun economic unity in Germany by the mid 1830s, the revolutions of 1848 failed in Germany and, twenty years later, Germany was still in economic chaos. Budding capitalism was intertwined with feudalism. There were not entrepreneurial notions or free markets as there were in Great Britain and the United States. In 1871, the Franco–Prussian War and France's defeat gave rise to the creation of one Germany. Thus, Germany joined the race during the second industrial Revolution: machinery making and steel. Germany's chancellor Otto Von Bismarck, after having banned the Social Democratic Party, began an early model of welfare in the 1870s. His "marriage of iron with rye" was designed to bring German produce to his armies by train and, ultimately, to unite Germany. His workers were well–provided for, and after Germany had become industrialized, its economy fell into place. Though it was still politically and militarily confused, its economics were beginning to stabilize.

Germany surpassed Great Britain economically in the beginning of the twentieth century, but plummeted again due to high inflation and occupation of the Ruhr. Germany had a brief recovery before the Great Depression and rose again before the complete crumble that happened during World War II. Once she was reestablished, however, Germany rose again and, in the early 1950s, grew by eight percent annually economically.

After the United States and Japan, Germany has the third most technologically powerful economy. Its capitalism has begun to struggle, however, due to its welfare system. There is a high social contribution on wages, which has raised unemployment levels. Taxes may be too high and unemployment benefits too tempting to encourage many to work. At the same time, Germany's population has grown older, using the resources set aside from social security while fewer in the younger generations are working and contributing to the bank of funds. There is also a continued integration of East Germany which is very costly for the country as a whole. There are annual transfers of roughly one hundred billion dollars. In 1999, growth slowed to 1.5 percent economically, due to lowered export and even lower confidence in the business sector.

New business, combined with tax cuts and increased Asian demand, may boost the growth higher again but the future of Germany is more uncertain than is has been for many years. The adoption of a common currency for the European Union and other communal integrations have affected Germany as well, though the specifics of the effects are still too young to analyze accurately.

Japan

The Japanese idea of capitalism is rather different than that of either the United States or Germany. The Japanese view capitalism as a way that communities can serve their customers, rather than a system to enable individuals to make a profit. This community logic has created a different, and equally successful, example of capitalism.

Companies in Japan not only take responsibility for their employees but also for the way its employees behave toward others. If an employee and his family had a fire, for example, their relatives and coworkers would help them rebuild what they had lost. In the United States, the family would be more likely to take a loan from the bank or to collect insurance money than to ask for collective help. In Japan, employees are paid more if they have larger families, whereas in the United States the size of someone's family is irrelevant.

The Japanese subscribe to amae (indulgent love), meaning that they treat their best customers as royalty. Giving can become intensely competitive. The idea of sempai–gohai is also popular: elder brother, younger brother relationships played out in the work place in the form of mentors and apprentices. A manager in Japan is likely to help his employees with their work lives and home lives. Work is all–encompassing rather than just time in an office where one spends part of each day.

Japan is a different kind of capitalist country. There is strong cooperation between industry and the government. There is also a very strong work ethic, an excellent technological sector of creation and research, and a relatively small defense spending allocation, as specified by rules set up after World War II. Japan only spends one percent of her Gross Do mestic Product (GDP) on defense. The combination of qualities have helped Japan compete strongly with China and the United States for the largest economy on the planet and have given it a second place slot in the most technologically advanced category of economics.

An important asset that Japan has is its Keiretsu, a philosophy of a tightly knit working unit made up of manufactures, suppliers, and distributors. Another ingredient is the guarantee of lifetime employment that Japan gives to much of its urban work force. Both of these assets are beginning to wane, however. There are several reasons for this. Industry is the most important sector of the Japanese economy, and industry is extremely dependent on imports of fuels and materials. The agricultural sector is much smaller and heavily protected and subsidized by the government. Japan is usually self–sufficient in rice but must import half of its grain and fodder needs. Japanese fishing makes up about fifteen percent of the world's catch.

For thirty years, Japanese economic growth had been outstanding. It has boasted a ten percent average in the 1960s, a five percent average in the 1970s, and a four percent average in the 1980s. In the 1990s, economic growth slowed remarkably. By 1995, the effects of over–investing and contradictory domestic policies which were meant to bring excess from the markets caused enormous economic shrinkage instead. In 1996, growth picked up a bit to under four percent due to stimulating monetary and fiscal policies and low inflation rates, but by 1998 Japan was in the middle of a taxing recession created by real estate, rigid corporate structure, labor markets, and trouble with the banking system. In 1999 the output began to correct itself with emergency government measures and an improvement in business confidence from increased government spending. The overcrowding of livable land continues to be a burden, however, and the relative aging of the populous is another concern, similar to the social security troubles in Germany and the United States.

Germany and Japan are similar in many ways, though as a group are very different from the United States and the United Kingdom. The latter two were early industrializers and they developed their economies through entrepreneurship. Their governments have only interfered after the fact, to curb adversarial wealth holders. Germany and Japan, however, were late bloomers and have played "catch–up" in the sectors of technology that they deemed most valuable. Their governments are up to date on the strengths of other economies and cooperate constructively with industrialization before the fact.

Comparisons

The United States and United Kingdom have very broad and sweeping education strategies which stress science and management. Their economics are split between macro (the entire economy) and micro (individual firms). Their social policies have been somewhat left behind and the governments may try to impose social burdens on businesses. Germany and Japan, in comparison, focus their education on technology and science. Their economic system is mainly meso, focusing on the dynamics of specific sectors of industry. The social policies are involved in industrialization efforts and the government considers social benefit crucial to its longevity.

The labor relations in the United States and United Kingdom are generally poor due to pressure on labor costs. In Japan and Germany, relations are still good because wages continue to rise. The American and British development philosophy is laissez– faire, free trade, whereas in Germany and Japan it is managed, protected, and targeted.

Historically, the western transition from feudalism was slow and complete. Industry was built on the values of individualism. In Japan and Germany, the conversion is still in progress. Industry is built on communal ideas of reciprocity. The countries differ in ideas of industry financing as well. While the United States and United Kingdom have short term equity markets and many risk takers in the stock market, the markets in Germany and Japan are dominated by banks and low–risk industrial institutions.

The many countries that are capitalistic are very different in their details and, though they share the capitalistic ideals on some level, what that means from border to border varies quite a bit.

ANALYSIS AND CRITICAL RESPONSE

There is a notable relationship between capitalism and democracy. Throughout the world, the successful capitalistic countries tend to be democratic. Great Britain is a good example of this relationship given the fact it is the birth place of both capitalism and democracy. Through the majority of the nineteenth century, Britain kept its international leadership role as a politically democratic and economically capitalistic nation. These qualities transferred to the United States in the twentieth century.

An absolute democracy which entails unlimited rule by the majority is not compatible with freedom and, likewise, with capitalism. Rights would be arbitrary because they could be voted away with the next meeting of leaders. The accepted definition of democracy has come to mean a democracy that is constitutionally limited in its power. The idea behind this kind of democracy is to choose who is in power and how that power is used, but exactly what power the leaders will have remains unchanged because it is outlined in the constitution. A bill of individual rights is also necessary.

Materialism

An interesting development in capitalism is that of materialism. The main object of capitalism is just that, an object. Capitalism relies upon consumers and their every whim, a majority who consumes without producing. Capitalism is based on distributing these goods, though the consumers have no relationship with the producers or the distributors other than meeting eyes with someone at the counter as they purchase their item. In the internet age, however, the middle man is cut out altogether and people order goods with a click of the mouse.

The only relationship consumers have is with the object itself. This gives the objects more relative importance. Part of capitalism is the mind set of these consumers, that they begin to identify themselves in terms of the objects they have purchased rather than by things that they have themselves produced.

Morality

Regarding morality, there is some debate about capitalistic virtues. Some argue that a capitalist nation is just because everyone is considered equal. Possessions are earned and the distribution of wealth is, in theory, fair. In the 1980s, Reaganomics, United States President Ronald Reagan's trickle down theory of economics, became popular. President Reagan predicted that even though much of the wealth was in the hands of few, through their spending and existence as people of their stature, their wealth would trickle down through society, remain in circulation and reach the less wealthy. What actually happened was financial investment rather than trickle down economics. Money was put in the bank and in stocks where it could not be reached by the rest of society. Trickle down economics did not work.

Many argue that capitalism is functional but not fair, and others feel that the opposite is true; capitalism is the only fair system to choose. Capitalism allows a division of wealth that would not be possible under communism where everything is communal and personal properties are limited. Because of the economic freedom, wealth is unevenly distributed among the players. So perhaps capitalism is practical, but if this is the case, why is the state increasingly involving itself in the market details? Federal taxes are proportionately higher than they have been since the Second World War, and federal regulations on the register are expanding by 60,000 pages each year. Even the recent tax cut will only have a small effect on the government revenue.

Advocates on both sides, the left and the right, seem to agree that capitalism is immoral but practical. They agree that the free market be kept in some sort of check by the government; it is only in the scope of that check that they differ. Is capitalism moral? Immoral? It allows for great discrepancies in the distribution of wealth, and depending on the explanation, whether one earns one's due or lucks into it, the feelings of fairness differ. In Capitalism: OpposingViewpoints, Michael Parenti argues that capitalism is immoral and quite exploitative:

The apologists for capitalism argue that the accumulation of great fortunes is a necessary condition for economic growth, for only the wealthy can provide the huge sums needed for the capitalization of new enterprises. Yet a closer look at many important industries, from railroads to atomic energy, would suggest that much of the funding has come from the public treasury—that is, from the taxpayer—and that most of the growth has come from increased sales to the public—from the pockets of consumers. It is one thing to say that large–scale production requires capital accumulation but something else to presume that the source of accumulation must be the purses of the rich.

Some argue that capitalism, however, is very moral indeed. Because of capitalism, we have all the products that are available today. There is an abundance of food, whether it reaches the corners of the earth or not. The life expectancy has doubled because of capitalistic driven research. We have air travel, air conditioning, aerospace technology and computers. It is the capitalist who envisions a product, researches it, and turns it into a saleable product.

Capitalism allows people to think freely and enables them to work out their thoughts. If the businessman cannot act on his own volition, his decisions will be limited as may his production and success. An important idea of capitalism is that everyone has the fundamental right to do with their life and property as they please. A government rampant with regulations can thwart this development, as evidenced by the many third–world nations and the fall of the Soviet Union. The free market drives the community to succeed by way of personal ambition. Adam Smith touched on this in his philosophy by saying that capitalism necessarily meant mutual agreement and mutual benefit.

The advocates of the moral defense of capitalism ask if capitalism is selfish, if it is selfish to take one's own lives seriously and to pursue happiness. A system that revoked some of the personal freedoms would take away some of this liberty and the option to follow a dream, however fantastic. Perhaps for these reasons capitalism is on higher moral ground than it gets credit for.

Modern Realizations

In the material world, there are a lot of problems with modern capitalism. The reality of capitalism was the closest to its theoretical self during its classical period from the middle of the 1700s to the end of the 1800s. Since 1900, capitalism has changed in several ways.

The corporate role The corporate form of business is partly to blame. This form allows for the separation of the ownership of a business from its management and financial control; a company sells its stock and becomes public. The shareholders are only liable for the company in so far as the number of shares that they own. Before the corporation, partnerships involved the complete responsibility of the partners for business operations. Partnerships were small and each member had a sense of moral, financial, and personal involvement with the company.

In the modern world, 100 million shareholders may jointly own a corporation. The connection between these owners and the managers is thin. The corporation may or may not even be in the same country as its owners, and generally less than one percent of the shareholders attend the annual business meetings to elect officers and managers.

Management, rather than owners, decides who runs the elections, who is up for election, what policy proposals are needed, and how salaries should be altered. When these propositions are put to a vote the result is usually over ninety–five percent in favor of the recommendations of management. In political elections, in comparison, the majority usually wins with fifty–two percent. The other forty–eight percent of the population votes the other direction. For this reason, there is a lot of skepticism about the level of democracy within corporate management.

With the government, the people who hold power are accountable to those who gave them this power through elections, assuming the country is relatively democratic and holds elections. The government is the agent of the people, created by and from the population. In theory, political power is in the interest of the people rather than based on what politicians want. With corporations, however, the management makes continual decisions which affect the shareholders. The management is not accountable to them, however, nor does it have any obligation to seek their approval beforehand.

Like other forms of empires, industrial empires fall prey to the same fate. They become increasingly conformist and bureaucratic, leaving the ideology and spirit of capitalistic competition and freedom in their wake as they forge ahead into impersonal rules and enterprises. In many ways, large–scale capitalist enterprise is similar to large–scale socialized enterprise. As corporations become bigger and bigger, they swallow the smaller businesses and the populous is left with fewer and fewer choices.

This has happened in the United States. When on the outskirts of a city it is difficult to tell what city


one is in because the surroundings are the same. There will be a Walmart and a Target, a McDonalds, a Taco Bell, a Bed Bath & Beyond and a local State Farm Agent. Free–enterprise is changing to become safe enterprise and the corporate giants are sweeping the country and leaving their mark across the planet. It is difficult to drive fifty miles without seeing the telltale blue roof of an International House of Pancakes or a Perkins flag.

The same phenomenon has occurred with personal individuals. Fewer than one tenth of a percent of the population own one fifth of all the stock, and though the number of persons owning stock has been increasing, this is still quite a discrepancy in wealth distribution, paralleling the big business ingestion of the smaller.

Competitive opportunities There is another side to the coin, however. There are still many opportunities for small businesses, provided they aren't in competition with large corporations; quite often, the existence of big business creates opportunities for small businesses. General Motors, for example, produces half of the passenger cars in the United States. Their domination of the market, however, creates opportunities for small mechanic shops, parts stores, dealerships, and gas stations. The corporations are still in some amount of competition amongst themselves as well. Target is pitted against Walmart. Linens & Things competes with Bed Bath & Beyond. General Motors competes with Ford, and there is also competition between its various divisions: Chevrolet, Pontiac, Buick and Oldsmobile. There is some debate, however, on the compatibility of competition and big business. It is less difficult, for example, to compete with one other company rather than having to compete with thousands of other companies who offer similar products. The drive to produce superior products may decrease.

Given the rapid change of technology and, likewise, people's desires and wants, there is a continual opportunity for new business. However, there is also a continual failure of businesses that are no longer relevant in the marketplace. Arguments for big business include greater stability for the employees due to less risk. Labor rights are safeguarded by the labor unions.

In big business, however, the profits need not be shared with the shareholders or with the consumer. If two companies merge, their combined assets may be profitable for management only. There are not regulations for this sort of wealth distribution, and monopolies benefit the owners at the expense of the consumer.

Critical Views

Structurally, there are some problems with capitalism. Because growth is driven by the desire for profit, it fluctuates according to the number of opportunities and openings. When an opportunity appears, capitalists hurry to take advantage of it and, consequently, there is an economic boom. Eventually, however, the market will be saturated and the boom will end, beginning a recession. Investment ends and the economy takes a dive.

Karl Marx published his criticisms of the ups and downs of the market in his 1867 work Das Kapital. Marx said that the growth was not only unsteady because of opportunities seized and missed, but also because of the natural progression toward industrialization and big business which, as explained earlier, makes the booms and recessions of the market more stark and profitable or, in the case of a recession, painful. Big business is not only encouraged by the advent of technologies which allow improved efficiency, but with recessions as well. When the market goes down, some firms will do better than others. The companies that have fared well usually swallow those that have not and become even larger and more successful than they were before.

John Maynard Keynes, an English economist, published The General Theory of Employment, Interest and Money in 1936. In his book, Keynes not only agrees with Marx that the ups and downs of a market economy are problematic, but goes further to say that it is possible for an economy to remain in a recession without periodic booms to balance it out. In terms of unemployment, Keynes felt that communal investment was the best way to fight this stagnation.

Another criticism of market–driven growth is the products produced by the capitalists can cause as much harm as good. Since the products are generally regulated only by customer demand, negative side effects often go hand in hand with production of goods. Toxic waste, unnecessary products, wasteful packaging, and poor working conditions are all side effects that accompany the products consumers demand.

There is heavy debate on how to deal with the apparent evils of capitalism. Some argue that the problems are not with capitalism but are actually lodged in the attempts to fix it. Well–meaning measures to curtail the market may lead to problems. The market should be left as independent as possible to ensure optimal operation. On the other hand, others advocates intervention and social welfare to distribute wealth more fairly, promote competition and deal with undesirable products of the market such as pollutants. Today, there are no advanced capitalistic countries that allow complete market freedom without social welfare to compensate for pockets of poverty. In the United States, these transfer payments for health benefits and pensions comprise ten percent of the total consumer income. In Europe the percentage is much higher.

In making his case for capitalism in Capitalism: Opposing Viewpoints, Howard Baetjer Jr. writes:

This is the virtue of the free economy. The whole fabric of economic interactions is freely chosen, cooperative, and generally beneficial. Each party to an exchange believes he is benefiting. This point bears emphasis because so many believe that in capitalism the rich get richer at the expense of the poor or that the seller of a good exploits the buyer, or vice versa, so that one is better off and the other worse off. When one is free to exchange in a transaction or not, he does so only when he believes he will be better off for it. Think about your trips to the ice cream shop: you put your money down for the ice cream; they put down the ice cream for the money. You care for the ice cream more than the money at that point, and they don't want the ice cream, they want the money. Everybody goes away content. There is a mutual 'thank you' as you exchange goods and money, because you both are better off…

People ought to be free economically as well as every other way. Laissez–faire is a great system, both practically, because it works to the increasing, as well as the well–being of all, and ethically, because it suits basic principles of decent interpersonal behavior. It is a system that deserves our hearty support.

TOPICS FOR FURTHER STUDY

  • There is a similarity between the changes that occur with capitalistic production and Marxist theory. The material basis of production goes through a series of shifts under both systems that alter the structure of civil institutions and the laws that govern them. Compare and contrast Marxist theory with Adam Smith's theory of capitalism.
  • How will the European Union affect the capitalism within its borders? Will the common currency promote a common capitalism, or will countries retain their beliefs and practices regardless of their neighbors' differences? Will Germany's economic strength remain, or will it lose its stature as it joins with the rest of the continent?
  • James Madison wrote in the Federalist Papers that governmental power might one day become less of a threat than that of the effects of freedom and personal liberty. Are his predictions are coming true? His checks and balances system protect us from the government, but we do not have a similar system to protect us from the corporations that provide us with goods and services.

BIBLIOGRAPHY

Sources

Beatty, Jack, ed. Colossus. New York: Broadway Books, 2001.

"Capitalism Theory: Frequently Asked Questions." Available at http://www.ocf.berkeley.edu/shadab/capit–2.html.

CIA World Factbook. United States, 2000.

Commire, Anne, ed. Historic World Leaders vol. 5. Detroit, MI: Gale Group, 1994.

Ebenstein, William and Edwin Fogelman. Today's Isms: Communism, Fascism, Capitalism, Socialism. New Jersey: Prentice–Hall, Inc., 1985.

Galbraith, John Kenneth and Stanislav Menshikov. Capitalism, Communism and Coexistence. Boston: Houghton Mifflin Company, 1988.

Hampden–Turner, Charles and Alfons Trompenaars. The Seven Cultures of Capitalism. New York: Bantam Doubleday Dell Publishing Group, Inc., 1993.

Hooker, Richard. "Capitalism," The European Enlightenment Glossary. Available at http://www.wsu.edu/dee/GLOSSARY/CAPITAL.HTM.

Kronenwetter, Michael. Capitalism vs. Socialism; Economic Policies of the U.S. and U.S.S.R. United States: Michael Kronenwetter, 1986.

Leone, Bruno. Capitalism: Opposing Viewpoints, Minnesota: Greenhaven Press, Inc., 1986.

Martella, John. "Philosophy, Economic History, and the Rise of Capitalism." Drury University, 1992.

Tracinski, Robert. "The Moral Basis of Capitalism," The Center for the Moral Defense of Capitalism, 1998. Available at http://www.moraldefense.com/Philosophy/Essays/The_Moral_Basis_of_Capitalism.htm.

Further Readings

Helpful internet sites include: http://www.capitalism.org;http://www.CapitalismMagazine.com; http://www.moraldefense.com; http://www.sharedcapitalism.org; and http://www.naturalcapitalism.org. These sites give current information on how Capitalism operates in the world today.

Marx, Karl, Capital: A Critical Analysis of Capitalist Production. 1886. Provides a critique of capitalist theory and practice.

Pryor, Frederic, A Guidebook to the Comparative Study of Economic Systems. 1985. Provides general information on capitalism.

Smith, Adam, The Wealth of Nations. 1776. This is the original text of capitalism.

SEE ALSO

Conservatism, Liberalism, Marxism

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Capitalism

CAPITALISM

Capitalism is both a special kind of self-organizing system for structuring economic activity and a historical movement in support of such a system. Its first full development is generally taken to have occurred in the late-eighteenth and early-nineteenth centuries in England, but its ideals of private property and open markets have been variously manifested and defended since. Capitalism is also coupled to a distinctive ethical view of the world, linked closely with developments in modern science and technology, and a source of challenges to other alternative ethical and political perspectives.


Historical Origins

The root of the abstract noun capitalism is the Latin capitalis, from caput, meaning head, from the hypothetical Indo-European qap-ut, by which cattle (another related term) are counted and thus in many preindustrial societies wealth measured. A popular but mistaken belief views capitalism as a transcultural phenomenon that "only needs to be released from its chains—for instance, from the fetters of feudalism—to be allowed to grow and mature" (Wood 2002). In reality, however, capitalism depends on special cultural conditions, including ethical commitments to the primacy of the individual and the importance of material welfare.

The political economist Adam Smith (1723–1790), who is often taken to be the father of modern capitalism, analyzes the accumulation of capital promoted by free markets and the productive efficiencies of increased divisions of labor. But the resulting economic order is what he calls a system of natural liberty. Even the extended critique of political economy found in the work of Karl Marx (1818–1883) prefers the more concrete das Kapital and der Kapitalist over der Kapitalismus; Marx's opposition is to the capitalist production system not capitalism. The English word capitalism first appears in print in British novelist William Makepeace Thackeray's The Newcomes (serial publication, 1854). It was left to later economists such as Werner Sombart (Modern Capitalism [1902]) and Max Weber (The Protestant Ethic and Spirit of Capitalism [1904]) to make capitalism as economic system and political ideology the center of debate.

As Weber, Sombart, and others make clear, capitalism as an economic system is closely associated with but not precisely the same as a market system. Free markets are possible on small scales, but capitalism presumes larger-scale industrial enterprises resting on both modern technology and a legal system that gives corporations the status of a person, thus creating a buffer between corporate and personal wealth and responsibility. Capitalism describes an economic system in which property resources are privately owned, but in a form not identical with individual wealth, with interactions between the supply and the demand for goods and services used to direct and coordinate economic activities. Once provided with a legal structure of private ownership enforced by the state and open markets, capitalism is self-organizing as if by means of what Smith once called an invisible hand. The result, it is claimed, is efficiency in two forms: technological (producing a given amount of goods with the minimum amount of resources) and allocative (distributing resources in the best way possible).



Science, Technology, and Capitalism

The role of science and technology in well-functioning capitalist economies is essential to their success. Continuing economic growth helps promote acceptance of inequalities, with such growth depending on increases in worker productivity, which is in turn supported by improvements in technology. Unfettered movement of capital, or access to capital, helps spur investment in research and development. This investment leads to scientific discovery and technological innovation, albeit sporadically.

It is also important to note that the free movement that is associated with capital and labor under capitalism has been more or less closely coupled with democratic politics. Indeed defenders of capitalism such as Michael Novak (1982) have argued that democratic capitalism must be distinguished from all attempts at centralized state control of science, technology, and capital.

However the relation between science, technology, and capitalism is two-sided. Not only does capitalism tend to promote science and technology, but science and technology have been argued to promote capitalism. Joel Mokyr's broad overview of economic and technological progress (1990) and of science and wealth (2002) place as much stress on how inventors and scientists have contributed to capitalism as how capitalists have funded technology and science. According to Mokyr, the development of systematic means for knowledge production and invention, and their institutionalization, went hand in hand with the development of systematic or industrial means of material production.

Scientists such as Michael Polanyi (1951) take this argument one step further and argue that the organization of science provides a model for democratic capitalism. It is in the scientific community that equality finds its strongest exemplar, and that the free flow of knowledge together with division of labor leads to an expansive production of knowledge that can serve as positive influence on and support for economics and politics.

At the same time the costs of some scientific and technological projects have on occasion been beyond the means of private capital formations. Historically states, not private corporations, have been required to pioneer public water systems, nuclear energy, major advances in airplane propulsion and design, cancer research, space exploration, the Internet, and decoding of the human genome. But it is mostly democratic capitalist economies that have provided the tax base and public support for such large-scale, big science efforts without measurable costs in consumer welfare—in the hopes that such expensive research and development projects would eventually contribute to greater public benefit.

For Mokyr, the roots of twentieth-century prosperity were the capitalist industrial revolutions of the nineteenth century, which were precipitated in part by the scientific revolution and Enlightenment of the seventeenth and eighteenth centuries. "To create a world in which 'useful' knowledge was indeed used with an aggressiveness and single-mindedness that no other society had experienced before was the unique Western way that created the modern material world" (Mokyr 2002, p. 297). Moreover in an increasingly knowledge-driven economy, scientists and engineers are themselves more often becoming entrepreneurial capitalists. The opportunities not just for profit but for conflicts of interest and other failures in professional ethics are nevertheless not to be minimized.



An Ethical Kaleidoscope

One key question imposed on policymakers in capitalist systems concerns the justice of those inequalities that capitalism promotes, and whether there might be appropriate remedies for such inequalities or alternative, more equitable systems of production. Capitalists typically argue both that property rights are grounded in human rights and that some level of inequality is beneficial to all because it stimulates productivity. Beyond social justice are other issues of professional ethics and cultural conflict that also deserve acknowledgement.

SOCIAL JUSTICE. The historical development of social justice issues can be traced to the classic period of the Industrial Revolution in England (c. 1750–1850). Social critics of the associated economic individualism among capitalists argued for an alternative of social solidarity among the workers and for some degree of common ownership of the means of production. Although specific mechanisms varied, a general term for this alternative is socialism.

The ideal of socialism, like capitalism, is a theoretical construct—a fiction. The spectrum of economic systems is bracketed by capitalism and socialism, but all economies in the early twenty-first century are in fact mixed, that is, lie somewhere in between these two extremes. On the capitalist end, economic individualism and the right to property are paramount, leading sometimes to major social inequalities. On the socialist end, communal ownership and collectivist values play a significant role, often leading to bureaucratic inertia. The historical response to capitalist failures has been state intervention, and to socialist shortcomings privatization.


THREE CONTINUING CRITICISMS. The issue of social justice has led to three general criticisms of basic assumptions of capitalist systems. The first basic assumption is that profits serve as the driving force for social as well as economic actions. If profits are not present, individuals will not have any incentive to act. But this view of humans as calculating, optimizing individuals may promote morally objectionable behavior. Defenders of capitalism respond that the profit motive is simply a reality of human nature (although the scientific evidence for this is at best ambiguous), appeal to the virtues of freedom of choice, and express faith in the ability of nongovernmental institutions to develop ethical protocols for behavior among individuals.

A second basic assumption is the sanctity of individual property rights. The criticism is that property itself is a kind of social fiction that in too strong a form may easily undermine equity or the collective good. In response, property rights are defended as basic human rights. Strong property rights are further argued ultimately to promote a productivity that benefits all, even though it may selectively benefit some more than others. An expanding pie gives even those with small pieces more to eat.

A third basic assumption is the value of free markets in both goods and services (the output market) and in the factors of production (the input market). Insofar as the input market is focused on material resources, liquid capital (money), and fixed capital (plant and machinery), this assumption is challenged only by environmentalists who argue that some natural resources may be undervalued. But the free market in labor input has a tendency, others argue, to treat humans as commodities. An unregulated labor market may lead to the violation of basic human rights—rights that, in other contexts, capitalism purports best to serve. The degree to which a society protects workers from the vagaries of the labor market is one strong measure of the influence of the socialist end of the capitalism-socialism spectrum.

The second and third assumptions—that capitalist systems have well-defined private property rights and input-output distributions guided by free markets—depend on ideal conditions that are unlikely to obtain fully in the real world. When property rights are weak or prices provide unreliable signals to market participants, a capitalist system may fail to realize its potential for good. In this regard, economists have identified four types of market failures under capitalism: (a) excessive market power where individual buyers or sellers have significant control over output, price, or both; (b) externalities where one economic agent imposes costs or benefits on another without the latter's knowledge or consent; (c) public goods where markets are either non-existent or the good will be underproduced because there is little or no incentive for private property owners to provide a good that others can use without paying for it; and (d) asymmetric or incomplete information where either the buyer or the seller lacks sufficient information to make a free and rational decision.

Failures (b), (c), and (d) offer special challenges for science and technology in capitalist economic systems. Scientists and engineers almost always know more than others about what they may be providing by way of productive inputs or outputs. In many instances scientific research and technological development take place at the leading edge of economic activity where there is not yet and may never be any market sufficient to support it. And certainly the requirements of free and informed consent in human subject research can dramatically illustrate asymmetries in information between scientists and nonscientist participants.

CULTURAL CONTRADICTIONS. Finally there are ethical issues associated with what sociologist Daniel Bell has termed The Cultural Contradictions of Capitalism (1976). According to Bell, contemporary society can be organized into three distinct realms: the technoeconomic structure, the polity, and culture. The technoeconomic order is concerned with the production of material goods and services; the polity with social justice, the proper use of force, and the regulation of conflict; and culture with the meaning of human existence as expressed in various imaginative forms. At any one historical period each further exhibits distinctive norms and follows its own rhythm of change, with complex interactions that may be mutually reinforcing or subtly undermining. From the perspective of this framework, one of the general challenges of capitalist modernity is the way in which drives for change in the technoeconomic structure threaten to undermine traditions of cultural meaning on which all social orders ultimately rest.

In the contemporary capitalist world the three realms are ruled by antagonistic principles: competitive efficiency for the capitalist economy, liberty and equality in the polity, and self-realization or self-expression in culture. Bell's particular argument is that not only are there tensions between the contemporary norms (which he interprets somewhat differently) operative in each of these three realms, but also within the modernist, self-expressive culture itself. Together such antagonisms may destabilize the whole social order or particular regions within it. Certainly between the special cultures of science and technology and the general culture of self-expression yoked to capitalist productivity there are tensions that threaten the stability of science, for example, when scientists hype their results or shape them to fit economic interests. The globalization of capitalism, as a carrier of science, technology, and particular cultural values, no doubt provides further opportunities for cultural conflicts.


WILLARD DELAVAN
CARL MITCHAM

SEE ALSO Conservatism; Critical Social Theory; Economics and Ethics; Market Theory; Marx, Karl; Smith, Adam; Work.

BIBLIOGRAPHY

Bell, Daniel. (1996). The Cultural Contradictions of Capitalism, 20th anniversary edition. New York: Basic Books. First published in 1976.

Berger, Peter L. (1986). The Capitalist Revolution. New York: Basic Books. Sociologist Peter Berger maintains that capitalism transforms all aspects of social being and that capitalism provides the most successful mechanism yet devised for improving the material wealth of humankind. He provides a provocative set of testable hypotheses about the relationship between the new capitalism and human values.

Heilbronner, Robert. (1993). Twenty-First Century Capitalism. New York: W. W. Norton. A fascinating extension of lectures examining the relationship between capitalism and the notion of progress encompassing capitalism as both political and social system and its future potential for fostering economic growth.

Hutton, William, and Anthony Giddens, eds. (2000). Global Capitalism. New York: Free Press. Explores the impact of globalization on capitalism. It is a rich source of new perspectives on the new capitalism, its connection to social cohesion and justice, and comparative economic and political systems.

Mokyr, Joel. (1990). The Lever of Riches: Technological Creativity and Economic Progress. New York: Oxford University Press.

Mokyr, Joel. (2002). The Gifts of Athena: Historical Origins of the Knowledge Economy. Princeton, NJ: Princeton University Press.

Novak, Michael. (1982). The Spirit of Democratic Capitalism. New York: Simon and Schuster.

Polanyi, Michael. (1951). The Logic of Liberty: Reflections and Rejoinders. Chicago: University of Chicago Press.

Schumpeter, Joseph A. (1950). Capitalism, Socialism, and Democracy. New York: Harper & Row.

Soto, Hernando de. (2000). The Mystery of Capital. New York: Basic Books.

Wood, Ellen Meiksins. (2002). The Origin of Capitalism: A Longer View. New York: Verso.

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Capitalism

CAPITALISM

a century of economic growth
the first industrial revolution, 1770–1870
the second industrial revolution, 1870–1914
bibliography

Disciples of Karl Marx generally define capitalism as a system of commodity production dependent on capitalists, accumulators of capital, and proletarians, laborers dependent on wages. Followers of Max Weber typically describe it is a system of economic organization reliant on markets and market structures. Everyone agrees that in Europe between 1789 and 1914 capitalism underwent an amazing metamorphosis both in regard to production and to exchange. After the end of the Napoleonic Wars an industrial revolution that first began in Britain in the late eighteenth century spread through western and central Europe. European society had hardly come to a rest before a second and even greater industrial revolution swept all before it between 1870 and 1914.

In the 1830s and 1840s, astute observers from the communist Marx to the laissez-faire champion John Bright initially believed that capitalist expansion would undermine state borders and that international markets and commercial entrepôts would replace states and their armies. But predictions of a pacific international capitalism undermining militaristic European monarchies proved tragically wrong.

a century of economic growth

Toward the later part of the eighteenth century, a wave of technological innovation, the expansion of British commerce into Caribbean and American markets during the wars of the French Revolution, and the large numbers of wage laborers in agriculture enabled Great Britain to be the first large state to operate on capitalist economic principles both in international trade and in industrial production. By 1840 more British workers were employed in manufacturing, mining, and construction than in agriculture. England was already more devoted to industry than the rest of Europe, and it continued to lead the industrial world throughout the nineteenth century. In England and Wales in 1891, 10 percent of the labor force was employed in agriculture and 44 percent in industry (manufacturing, mining, and construction); in Germany in 1895 comparable figures were 37.5 percent in agriculture and 36.4 percent in industry; while France in 1891 still had 40.3 percent of its labor force in agriculture and only 27.9 percent employed in industry.

A distinctive feature of European growth during this period was increased population growth combined with even faster economic growth. In 1700 the population of western and central Europe was more than 81 million; in 1820 it had grown to 133 million; in 1870, 188 million; and in 1913, 261 million. But over these time spans economic growth exceeded population growth. The contrast between levels of per capita gross domestic product (GDP) in Europe and Asia is remarkable (see Table 1). Although population growth was substantial between 1789 and 1914, it did not drown out economic growth.

Contrasting Levels of Per Capita GDP in Europe and Asia, 1700 to 1913
170018201913
Britain1,4042,1215,150
France9861,2303,485
China600600552
India550553673

the first industrial revolution, 1770–1870

In 1851 amazed continental Europeans traveled to the London Great Exhibition to marvel at the new technologies based on steam, iron, and cotton mills, technologies that were already spreading from their British epicenter to western and central Europe. Between 1820 and 1870, the years in which the First Industrial Revolution spread through the Continent, western and central Europe witnessed a growth in per capita GDP of 0.95 percent per year; this was relatively modest judged by the standards of the golden years between 1950 and 1974, but it was six times faster than annual economic growth for the more than three centuries between 1500 and 1820.

Despite this record of economic growth, the Industrial Revolution inflicted real hardships on the British population, and the people who sacrificed were not those who benefited. In 1799, at the age of seven, the orphan Robert Blincoe was removed from the St. Pancras poorhouse in London and, along with other young boys and girls, sent by the municipal authorities to cotton mills in Nottingham in north central England. At five o'clock in the morning the young orphans were awakened and fed a breakfast of milk porridge and a scarcely digestible rye bread. By five thirty, the boys and girls were at work in the factory, where they stood without interruption until twelve noon and worked a total of fourteen hours per day, sometimes extended an additional hour or two. The manager told them to "do your work well and you'll not be beaten."

Did the living standards and social condition of most British workers decline during the First Industrial Revolution? The controversy over living standards has been one of the longest sustained scholarly debates, but new findings by anthropometric historians have renewed interest in the question. Anthropometric historians study the height of human populations. While height is influenced by inheritance, it is also strongly influenced by nutrition. Populations that are well fed and live in healthy environments grow taller than malnourished populations in disease-ridden or polluted areas. Anthropometric studies show that heights were increasing in the early years of the Industrial Revolution but began to fall after 1840 as larger and larger proportions of the working-class population urbanized. Heights did not reach 1840 levels again until the eve of World War I. These findings constitute a serious challenge to optimistic interpretations of the First Industrial Revolution.

Unemployment was an enduring problem created by the expansion of a working-class population dependent on wage labor. Sending homeless children such as Robert Blincoe to the mills relieved Poor Law guardians of part of the burden, but emigration was another and more comprehensive solution. In hard times, British municipal authorities subsidized the emigration of the unemployed and of workhouse orphans, and these joined British and Irish rural migrants already on their way to North America. During the Irish Potato Famine (1846–1851), landlords offered emigration as an alternative to ejection and the murderous Irish Poor Laws. After the famine, Irish migrants followed their friends and kin, mainly to the United States but also to Australia, Canada, and New Zealand. German peasants too fled an increasingly crowded countryside. Given the cost of the journey and its length and hazards, very few returned.

By increasing continental Europe's contacts with Britain, the fall of Napoleon I promoted the spread of the Industrial Revolution. The French Revolution and Napoleon may have retarded Continental economic growth, but they created a legal framework that would be crucial for the spread of capitalist industry on the Continent. The Napoleonic Code of 1804 legislated a new quasi-absolute conception of property rights. It undercut complex systems of property holding that gave peasants usage rights while retaining eminent domain for local nobles. It abolished morte-main, perpetual leases and rents, entailments, and primogeniture. The code traveled with Napoleonic armies, but long after their retreat it remained in effect or served as a model for European legislators. At the same time, continental European states, struggling to catch up with Great Britain, played a much more active role in encouraging industrialization, underwriting the cost of railroad building and subsidizing heavy industry.

Still in the years before 1848 the progress of Industrial Revolution was relatively slow throughout continental Europe. Only Belgium, parts of France, a few areas in Germany, and a portion of Bohemia had really begun to adopt the new English industrial technologies. Large-scale coal production was confined to the Liège basin in Belgium and the Stéphanois basin in France. The Upper Silesian coalfields were in production in both Prussia and Bohemia, but transportation costs limited production to local purposes. Of all the technologies of the Industrial Revolution, only textiles had spread across the Continent from Barcelona to Lódz. Cotton textile towns such as Barmen, Elberfeld, Elbeuf, Ghent, Mulhouse, and Verviers more or less recapitulated the miserable living conditions of their English urban contemporaries.

While still in the process of assimilating the mills and furnaces of the First Industrial Revolution, Europe was soon shaken by a second and greater wave of industrial transformation: a second industrial revolution centered in western and central continental Europe, in Germany perhaps even more than in Britain.

the second industrial revolution, 1870–1914

The 1889 Exhibition Universelle in Paris was dominated by Gustave Eiffel's great tower marking the beginning of the age of steel. This Second Industrial Revolution was based on steel, electricity, chemicals, rubber, undersea cable, and great metal factories. Many of the important features of the economy of this age stemmed from its need for the enormous amount of fixed capital required for the integrated steel factories and the great metalworks and coal mines of the period. Often located near vital resources such as iron ore or coal, these new technologies were capable of producing large amounts of cheap steel, but their economies of scale required a large and steady mass market.

By 1914 industrialized Germany, endowed with abundant coal and access to ore, dominated the Continent, but everywhere wage labor was expanding rapidly as a proportion of the economically active population. In the era of the Second Industrial Revolution between 1870 and 1914, GDP per capita grew at an annual rate more than 30 percent faster than that of the era of the First Industrial Revolution. Whereas the mills of the First Industrial Revolution had increased the percentage of women and children such as Robert Blincoe working for wages, the factories of the Second Industrial Revolution sought adult males. While light metal factories sometimes employed young women as finishers, the great metal factory and the mining basin generally offered little employment for women. Both large employers and male workers saw the household as women's natural territory. Large employers preferred married males because they were considered more stable than single men. And at home women could feed and clothe male workers, tend to them when they were sick, and raise their children. Despite male convictions that women belonged in the home, the vagaries of employment and domestic need usually required even married women to work for wages at least for some portion of their lives.

Women had more opportunity in the growth of the white-collar workforce. Stereotypes of the workforce of the Second Industrial Revolution often focus on the male factory worker, the burly fellow with the muscular hand featured in the socialist posters of the time. But growing just as fast as the blue-collar factory workforce was a white-collar clerical workforce that often included women, although usually at the lower levels and for lesser pay. The spread of the department store, cooperatives, grocery chains, and mail-order houses and the expansion of branded, packaged consumer goods further increased the number of white-collar workers at the expense of the small shopkeepers and small producers who belonged to the lower middle class. After 1860 Félix Potin built a grocery empire of chain stores selling his own products made in his own factories and stored in his warehouses on the edge of Paris; in Great Britain, Thomas Lipton's sale of standardized quarter-pound tea packages was the


basis of his grocery empire. Many white-collar workers, both men and women, were teachers whose numbers grew as compulsory education spread throughout many areas of western Europe (it already existed in many German and Scandinavian states). At the same time the new diversified corporations of the period needed secretaries and typists; originally these were males, but by the second half of the nineteenth century the clerical profession feminized.

The rapid evolution and diversification of the European economy was made possible by its global expansion. Intercontinental regulatory organizations developed rapidly. In 1865 the International Telegraph Union was formed and in 1874 what was later called the Universal Postal Union; these international organizations established consistent standards and common practices for new technologies and new institutions. They would soon be joined by a host of similar organizations such as the International Bureau of Weights and Measures (1875), the International Union for the Protection of Industrial Property (1883), the International Railway Congress Association (1884), and the International Union for the Publication of Customs Tariffs (1890). Although none of these organizations possessed armies, the growing international economy of the second half of the century could not have developed if leading nations had not followed their rules.

No aspect of intercontinental expansion is more striking than the relatively unregulated international labor migration of Europeans to the Americas in the second half of the nineteenth century. Between 1850 and 1914 the steamship, the locomotive, and the marine cable produced classic transportation and communication revolutions. New inventions, the introduction of the screw propeller, and the construction of better designed, more fuel-efficient boilers increased the speed of travel while decreasing its cost. Over this period, technological innovation and fierce competition reduced the average time spent on the "Atlantic Ferry" from five to six weeks to ten to fourteen days. In 1869 the opening of the Suez Canal almost halved the trip between the United Kingdom and India. On land the railroad brought a similar revolution, and by 1914 the basic railway network had been constructed in India, the United States, and western and central Europe (but not Canada or Russia).

Between 1870 and 1914 roughly 14 million Europeans left the "Old Country" for good, mainly moving to the United States or Latin America or within the British and French empires to Algeria, Australasia, Canada, or South Africa. Combined with the movement of Indian and Chinese labor to Africa, the Caribbean, and Southeast Asia, no such transcontinental movements have been seen before or since. States' policies of leaving European migration relatively unregulated contrast strongly with their attitudes toward non-European migration; the United States, Canada, and Australasian states welcomed white Europeans while closing the doors to non-Caucasians. Reduced transportation costs and more powerful steamships that shortened the sailing time made return practical. In fact many Poles and Italians did return.

Mass migration affected the condition of unskilled labor throughout most of the greater Atlantic region. In the late nineteenth century, European living standards began to catch up with those in the Americas while the living standards of the Irish, Scandinavians, and Italians moved toward those of industrialized England and Germany. Inevitably calls for state restriction of emigration swelled among trade unionists and popular movements in receiving countries.

A communications revolution enabled Europeans to follow international events. From 1867 onward the development of cables made possible rapid communication across the Atlantic. By 1914 submarine cables linked all the continents. While news passed instantly across continents, it was transmitted to Europeans through daily mass newspapers printed in newly standardized national languages and often cast in the language of an increasingly strident nationalism.

The growing domination of world trade by the gold standard introduced still another important example of transnational economic regulation. In the 1870s major European countries and the United States joined the United Kingdom in fixing their national currencies in terms of a specific amount of gold. At its most ideal, a client ordering a commodity from a foreign producer could calculate the cost of the transaction knowing the price of the commodity and the exchange rates of the currencies in question for gold, largely avoiding the fluctuating currency exchange rates that introduce another element of uncertainty into trade. Through a combination of bank rates, foreign loans, and open market exchanges, the Bank of England enforced the gold standard, usually in coordination with French and German bankers.

Communication revolutions also facilitated foreign investment, and rates of foreign domestic investment attained remarkably high and sustained levels in the pre–World War I period. The years between 1870 and 1914 witnessed a massive outflow of British capital for overseas investment. The United Kingdom directed half of its saving abroad, and French, German, and Dutch investments were also substantial. By far the largest part of foreign investments was confined to Europe, North America, Australasia, and South Africa. Still the colonial world benefited from these investments. In part, the construction and expansion of great colonial empires by the British, Dutch, and French, imitated on a smaller scale by the Americans, Belgians, and Germans, encouraged investment in the colonial world. In theory the British Empire was committed to free trade, but the practice was sometimes more problematic. Indian administrators' decisions to opt for heavier and more expensive British railway engines instead of cheaper and lighter U.S. engines were probably influenced by considerations of imperial loyalty.

Despite the creation of an Atlantic labor market, the spread of technological and communicative revolutions binding continents, and the growth of transnational regulatory agencies, the internationalism of the epoch generally benefited states that provided regulatory control for capitalist markets and protection from the fluctuations of international trade. Consolidated states—bureaucratized, centralized states—created the legal foundations of the modern capitalist order. New business structures and financial relations were necessary to attract the enormous capital necessary for late-nineteenth-century heavy industry. At the beginning of the nineteenth century most partnerships were based on the principle of unlimited liability, making even inactive partners totally liable for debt in case of business failure. This seriously limited the ability to raise capital. In France the limited liability partnership had its roots in the late seventeenth century and the beginnings of the modern corporation dated to 1815, but the practical obstacles to their formation were formidable and had only slowly eroded by the 1860s. In the United Kingdom limited liability corporations made slow progress until a spate of acts between 1844 and 1856 made their formation relatively easy.

In the 1850s and 1860s many manufacturers and agriculturalists remained committed to free trade, which seemed to promise immediate economic benefits; even many French manufacturers who supported protectionism were in favor of free trade "in principle." Everything changed between 1877 and 1896 when even hitherto successful large-scale industrialists and most agriculturalists


discovered their own vulnerability. The 1889 bankruptcy of the great Terrenoire steel plant, the largest Bessemer producer in France, revealed that even the most modernized plants were not secure. This economic crisis led many steel producers to realize that the high fixed costs of their great factories, required to achieve economies of scale, made these plants utterly dependent on steady markets. At the same time, European agriculture found itself under assault. New refrigerator ships that could travel from Australia and the Americas in only a few days drastically lowered the cost of meat, and shipping plus the extension of the railways put cheap wheat from the U.S. Midwest and Russian Ukraine on western and central European tables.

As a result of their experiences during the 1870s and 1880s some of the most powerful groups in European society, both large industrialists and agriculturalists, rallied to create a new protectionist political order. In 1892 French industrialists joined agriculturalists to support the protectionist Méline tariff. In 1902—in a sure indicator of changing attitudes—the Birmingham industrialist and former Liberal leader Joseph Chamberlain publicly called for protectionism. For many industrialists, however, protectionism was only part of the story. These large producers used protectionism to stabilize their position in the home market so as to better compete in foreign markets. States and diplomats were used to sell the products of heavy industry and to promote metropole industry in the colonies. One relatively stable home market was the military market, and many industrialists began to cater to the new need for cannons and battleships. By the end of the century, early dreams that international capitalism was a pacific force for free trade gave way to the realities of military–industrial alliances.

The protectionism structuring international economic relations was accompanied by the formation of national business cultures and by a statism shaping internal industrial relations. Structured by state laws, the giant corporation that developed in the years after 1870 became a permanent feature of the capitalist world and also created a national culture of capitalist relations. To make its costly new technologies pay, producers had to be proactive in the search for markets. They involved themselves in marketing and sales. To keep production and marketing in balance a new type of manager was required: a person not only proficient in the new technologies but also able to coordinate different corporate sectors and divisions. Germany and the United States, both younger capitalist nations, were more innovative and imaginative in employing corporate forms than Great Britain. British family firms had led the way, but their continued reliance on family ownership limited their ability to raise funds. Further, the heads of family firms often followed the founder in focusing on production, thereby failing to appreciate the importance of marketing and sales so essential to the success of U.S. and German corporations.

The example of Germany illustrates how capitalist corporations formed distinctively national cultures. German businessmen adopted corporate forms quickly, and early on they established relations with government-supported German universities, which were at that time world leaders in scientific research. Unlike in either the United States or the United Kingdom, a handful of large banks played a leading role in financing German industrialists and established close relations with corporate leaders, all starting in the 1870s. Bankers played a key role partly because of the difficulties of raising capital in Germany but also because their intimate involvement with company affairs, as shareholders and representatives of shareholders, provided a guarantee of corporate integrity. While providing venture capital, industrial banks minimized the risks of cutthroat competition, promoting cooperation among leading Germany companies.

The intimate relationship between banks and heavy industry in Germany was unique, but among industrial nations governmental action to promote growth produced substantial variation in the economic environment. Since the Revolution, the French state had focused on training highly qualified engineers with close ties to government. Although modest efforts were made to train skilled workers later in the century, most skilled workers were trained on the job, where they learned plant-specific information. By contrast, in the 1890s the German state invested substantially in creating a system of schools for white-collar engineers and technicians and a separate system for blue-collar skilled workers. In 1897 this dual system was made uniform throughout Germany and enabled German industry to rely on a standardized, qualified labor force. The presence of well-trained skilled workers in Germany and the importance of technical elites in the French system importantly influenced the evolution of industry in both countries.

Dependence on states for protectionism, for regulation, and for infrastructure encouraged capitalist nationalism, as did the growing state demand for armaments among European states embracing both colonialism and militarism simultaneously. As illustrated in the first Opium War (1839–1842) between Britain and China, advances in steamboat technologies enabled Western powers to extend their domination from the coast to the interior of Asian and African nations. The technologies of the Second Industrial Revolution produced powerful new weapons pioneered on European battlefields but soon adapted for colonial warfare. The invention of the breechloader enabled gunmakers to construct rifles that were fast, more accurate, tough, and impervious to the weather. French


chemists developed smokeless gunpowder, and in the 1870s the repeater rifle spread. Within a few years, British troops were using the Maxim machine gun. This new weaponry combined with growing experience with tropical diseases and the means to forestall or overcome them made feasible military expansion into the interior of the Asian and African continents.

If capitalists increasingly identified themselves with their state so did many of their workers. The international socialist organizations were splendid ideological structures, but consolidated states loomed ever larger in working-class life. The growth of a large blue-collar working class that depended on wage work tied social stability to the boom-and-bust cycle of capitalism. Increasingly, political leaders in countries with large numbers of industrial workers began to take action, creating the foundations of modern welfare states. The German Empire was the pioneer. Otto von Bismarck (1815–1898), the "Iron Chancellor" who had united the German state, created the framework for the first national welfare state. After prolonged resistance in the Reichstag, in 1883 Bismarck passed a compulsory sickness insurance bill; in 1884, compulsory accident insurance; and in 1889, compulsory old-age insurance. The targets of this legislation were mainly skilled male workers; it is worth underlining how closely the welfare state was linked to the proletarians of the Second Industrial Revolution. Only later were these programs extended to white-collar workers. After a sweeping Liberal victory in 1906, the United Kingdom passed its own legislation, most importantly the National Insurance Act of 1911, which included provisions for unemployment insurance targeted exclusively at skilled industrial workers. By 1914 all the major European countries except Russia had compulsory accident insurance laws, and even Austria-Hungary had old-age pensions.

By 1914 capitalist industrialization had spread to every country in Europe, but it had not spread everywhere equally; it was concentrated in great industrial regions that sometimes straddled territorial borders. One such region stretched through northwestern Europe from Lille in northeastern France to Namur in southern Belgium to Dusseldorf in western Germany. The Ruhr in western Germany included the greatest agglomeration of mines and factories in the world, while textile plants proliferated in Barcelona and its hinterlands and in the Lódz basin in Russian-held Poland.

In regard to the dissemination of technology, the migration of labor, and participation in the gold standard, European capitalism in the years between 1789 and 1914 was thoroughly internationalist. The basic trends sweeping European economies were transnational, the same as those shaking the United States and beginning to sway Japan. Yet European capitalism ultimately reinforced and enhanced the power of European states. States supported capitalism but made themselves its gatekeepers. State regulation imparted a national character to European capital. The turn toward protectionism made states central to the new industrial economy, and the growing armament of the pre-1914 world made states important customers of capitalist industry. While European capitalism had powerful currents both nationalist and internationalist, in the end, in August 1914 statism triumphed over internationalism.

See alsoBanks and Banking; Business Firms and Economic Growth; Class and Social Relations; Economic Growth and Industrialism; Emigration; Immigration and Internal Migration; Imperialism; Industrial Revolution, First; Industrial Revolution, Second; Labor Movements; Marx, Karl; Socialism.

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Michael Hanagan

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Capitalism

CAPITALISM.

EUROPE ON THE EVE OF THE FIRST WORLD WAR
WARS AND DEPRESSION
GROWTH AND REGULATION
GLOBALIZATION AND DEREGULATION
BIBLIOGRAPHY

During the twentieth century, Western Europe's gross domestic product (GDP) grew at the annual average rate of 2.5 percent. Put another way, it increased more than ninefold in real terms between 1914 and 2004. Measured per capita, income levels increased nearly fivefold during the same period, at an annual rate of 1.7 percent. This general trend, however, conceals major differences between periods (table 1) and between countries, with Britain on the whole lagging behind its main competitors though starting from a higher level of income.

The rhythm of economic change is a reflection of the dynamics of European capitalism, of the interplay of economic, social, and political factors—war and peace, international cooperation and competition, monetary regimes, technological innovation, levels of industrialization, corporate structures, social relations of production, state intervention, and regulation. This entry will examine how these various factors have influenced Western Europe's economic development in the course of the twentieth century. One recurring theme will be the convergence and divergence between European economies and societies, and the extent to which various types of capitalism have coexisted in Europe. Although most countries will be referred to at some point or another, the discussion will be primarily concerned with Europe's three leading economies: Britain, France, and Germany.

EUROPE ON THE EVE OF THE FIRST WORLD WAR

When war broke out in August 1914, European capitalism had been partly reshaped by the effects of a profound economic and social transformation, usually known as the second industrial revolution. A deepening of the industrialization process and a number of technological innovations led to the emergence of new industries, which were to form Europe's industrial base for most of the twentieth century—steel, electricity, chemicals, motor cars, oil, rubber, aerospace, and synthetic fibers, as well as consumer durables in food, drink, and tobacco. These industries were characterized by a more systematic application of science to industry, greater capital requirements, and the rise of large firms.

Big business, which had hitherto been mostly confined to railway companies, thus became one of the major institutions of European capitalism in the twentieth century—without, however, ever reaching the same proportions as in the United States. Large firms came to dominate the new industries because of the economies of scale or of scope made possible by significant progress in production techniques, in particular continuous-process production (in the refining and distilling industries, as well as in the chemical and metallurgical industries) and the assembly of interchangeable parts (more characteristic of the machine industry, including electrical engineering); and because of their increasing need for backward (mostly into raw materials) and forward (semifinished products or distribution) integration.

Big business in Europe displayed both common features and national specificities, reflecting in large measure national patterns of capitalist

GDP GDP/head GDP/hour worked
1890–19932.51.92.6
1890–19132.61.71.6
1913–19501.41.01.9
1959–19734.63.84.7
1973–19932.01.72.7

organization. Truly large firms (with say a workforce of five thousand people or more and market capitalization of $20 million or more) were hardly to be found outside Europe's three largest economies (Britain, France, and Germany), even though the perception of big business, in terms of political as much as economic power, existed in all countries. Similarly, family ownership and control persisted everywhere, including in Europe's largest companies, such as Krupp and Siemens in Germany, Schneider and de Wendel in France, and Vickers and Barclays Bank in Britain, to give but a few examples. State ownership was still limited, though not insignificant with, for example, the nationalization of the Prussian railway network in 1879, the British government share in the Suez Canal Company and the Anglo-Persian Oil Company and, everywhere, the public ownership of the newly established telephone companies.

Even though the frontiers of big business tended to be limited to the unit of the firm, alternative forms of organization included business groups, mostly found in France and based on crossed ownerships and interlocking directorships; and cartels were present everywhere but particularly popular in Germany, a form of horizontal concentration where firms retained their independence while agreeing on prices and quotas of production.

In the financial sector, British, French, and German commercial banks had become giant firms. Moreover, huge financial transactions were also undertaken by family partnerships in the city of London, the world's financial center in the age of the first globalization—a type of big business organization different from its traditional embodiment in a large or giant firm and more typical of the British economy, where markets played a more important role than in Continental Europe.

Finance was indeed triumphant in Britain, even though the concept of "finance capital," coined in 1911 by the German statesman Rudolf Hilferding, has been used to describe a German phenomenon, the "merger" between banking and industrial capital under the leadership of the big banks. Europe was the world's banker in 1914, above all Britain, with some $18 billion invested abroad in 1914, representing 42 percent of the world's total, well ahead of France (20 percent), Germany (13 percent), Belgium, the Netherlands, and Switzerland (together 12 percent), and the United States (8 percent), which was also the largest importer of capital. Nevertheless, capital mainly flowed toward less developed countries, leading to heated debates between both contemporaries and generations of historians about the links between capital exports and imperialism, characterized by Vladimir Lenin (Vladimir Ilyich Ulyanov; 1870–1924) as the "highest stage of capitalism"—though such analyses have lost a great deal of their impact since the mid-1980s or so.

To what extent had different types of capitalism emerged in Europe at the eve of World War I? The issue has been widely debated, from different perspectives. The notions of "personal capitalism" (for Britain) and "managerial cooperative capitalism" (for Germany) have been applied by the economic and business historian Alfred Chandler (b. 1918) and his followers, mainly on the basis of big business organizational structures and forms of ownership—though no real differences existed in this respect between the two countries, even allowing for the prevalence of cartels in Germany. The same could be said of the concept of "organized capitalism," often applied to Germany past and present. Projecting contemporary analyses to the pre-1914 period, early forms of a "bank oriented capitalism" have been detected in Germany, and of a "market oriented capitalism" in Britain—a contrast that points to the longer-term commitment of German banks to industry, and to the greater development of the British capital market, but overestimates the effective differences between the two countries.

Similarly, any talk of "winners" and "losers" of the second industrial revolution seems misplaced. The winners are commonly assumed to be the United States and Germany, the losers Britain and France. As far as Europe is concerned, economic growth was indeed faster in Germany than in Britain and France during the Belle Epoque, the years spanning from turn of the twentieth century to World War I. Real GDP grew at the annual average rate of 3 percent in Germany, 1.5 percent in Britain, and 1.7 percent in France, and GDP per head at respectively 1.2 percent, 0.7 percent and 1.0 percent—prompting talk of a relative economic decline in Britain, while the gap between France and Germany was narrower when measured per capita, because of France's weaker demographic growth.

These differences have often been attributed to the greater success of Germany in the new industries. The assumption might seem right when considering electrical engineering, where American and German firms established an early dominance. On the other hand, Germany had a near monopoly, with Switzerland, in dyestuffs, where the United States did not do much better than Britain and France. Things look different again when looking at motor cars, where France was the world's number one until 1904 and only second to the United States thereafter; while in oil, synthetic fibers, and consumer durables, British firms were far more competitive than their European rivals. The dynamism of German capitalism should not be questioned when accounting for the country's economic performance before World War I. However, the fact that Germany was catching up with Britain, the leading economy of the day, goes a long way to explain the difference in the growth rates between the two countries.

In the end, differences rather than divergence best describe the diversity in European capitalism on the eve of World War I. Differences between predominantly "industrial" societies—the proportion of the workforce employed in the secondary sector (50 percent in Britain, 41 percent in Germany, 34 percent in France) was higher in Western Europe in 1910 than anywhere else in the world, including the United States (30 percent). Differences between welfare states, which had emerged in all European countries—a politically motivated early start in the 1880s under the German chancellor Otto von Bismarck (1815–1898), with social insurances mainly targeted toward skilled workers; and a more universal and redistributive system in Britain (and in the Scandinavian countries) following the Liberal reforms of 1906–1911. Different strategies, besides a common paternalism, were followed by employers facing a rising and more militant union-ism—early recognition of trade unions by British employers, with increasing determination to preserve the "right to manage" compared to an authoritative stance and refusal of collective bargaining by German and French employers, especially in the heavy industries.

WARS AND DEPRESSION

The period described by Eric Hobsbawm as the "age of catastrophe," marked by two world wars and the most severe depression of the twentieth century, had profound repercussions on capitalism in Europe. At the international level, the balance of power shifted with the transfer of world leadership from Britain to the United States; while in Continental Europe, Germany's rise was temporarily halted, whereas France was initially given a boost before having its momentum slowed by the Great Depression and then the rout of 1940 and the occupation.

Economic growth slowed down dramatically, with real GDP and GDP per head increasing at an average annual rate of respectively 1.4 percent and 1 percent, well below the secular trend (table 1). There were, however, differences, between periods—the 1920s were on the whole more dynamic than the 1930s—and between countries—which fared unevenly and responded more or less adequately to changing economic conditions.

World War I brought about two major developments, which were to mark in varying degrees the functioning of European capitalism for the rest of the twentieth century: one was the greater involvement of the state in economic affairs, the other was recurring monetary instability, in particular inflationary pressures.

State intervention in the economy was a logical consequence of the constraints of a total war fought during four years between highly industrialized countries, with the home front playing a decisive role in the eventual outcome. The supply of raw materials and the production of armaments, in particular, required government coordination and control. In all countries, these tasks were often entrusted to businessmen who, as experts, were called to fulfill senior administrative and sometimes ministerial functions—Walther Rathenau in Germany (in charge of the raw materials department in 1914) and Louis Loucheur in France (as minister of armaments in 1917) are two of the best-known cases.

State intervention receded after World War I, as a result of both the gradual return to normal economic conditions and the wishes of political and economic leaders. Nevertheless, in all countries, a number of measures had to be taken in the field of industrial organization, not only to face the disruptions caused by the war, but also to answer the calls for nationalizations voiced by a politically more powerful labor movement. Hardly any nationalization took place in the interwar years. But industry and public services became more regulated—in Britain, for example, the Railways Act of 1921 reorganized the country's network into four large regional companies, while the Electricity Act of 1926 established a national grid to connect all generating stations, which were overseen by a newly created Central Electricity Board.

Economic policy also became more active, in particular in monetary matters. The gold standard, which had underpinned the international monetary system since the 1880s, stopped functioning at the beginning of World War I. Restoring it, however, came up against numerous obstacles. The United States was the first to reestablish the convertibility of the dollar from 1919, but a widespread return to prewar parities seemed difficult. Inflation was rampant in all the belligerent countries as well as in the neutral countries, but the scale of price increases varied considerably from one country to another. And the differences became more pronounced in subsequent years among the countries that managed to bring inflation under control (the United States, Britain, and the former neutrals), the more inflationist victorious countries (France, Belgium) and the defeated countries ravaged by hyperinflation (Germany, Austria).

The gold standard was finally restored between 1924 and 1926 in conditions that affected economic performance during the whole decade. Britain suffered from an overvalued currency following the pound's return to gold at its prewar

1920 1924 1929
Britain100111128
France62110142
Germany6482120
Belgium84114140
Netherlands127136187

parity in April 1925, a decision deemed necessary to restore the country's position in the world economy. France, by contrast, was helped by an undervalued currency after the de facto stabilization of the franc in December 1926—and de jure in June 1928—at only a fifth of its prewar parity after two crises (in January 1924 and July 1926) had taken it to a much lower level. The contrast is clearly visible in the two countries' level of industrial production in the 1920s (table 2). Britain was further handicapped by the structural crisis of its old export industries (coal, iron and steel, textiles, shipbuilding) coming up against competition from newly industrialized countries, while France's industrial expansion, which had been interrupted during the war (not least because of the loss of the northern and northeastern frontier areas) resumed with renewed vigor. Like France, Belgium also benefited from an ever more devalued currency; while the Netherlands, which like Switzerland and the Scandinavian countries had restored its currency at its prewar parity in 1924, took full advantage of its neutrality during the war, in particular in terms of industrial capacity and export markets. In Germany, where the Reichsmark replaced the mark at a trillionth of its prewar value, a number of constraints held down industrial growth, including the ravages of hyperinflation and the loss of territories and industrial capacity, as well as structural imbalances in the economy.

Reorganizing capitalism was envisaged and debated in the 1920s. This was the heyday of the "rationalization" movement, whose basic principle revolved around producing more efficiently, and hence generating more profits, a portion of which could be redistributed to employees in order to improve industrial relations. The notion of rationalization was fairly vague, with both a microeconomic (primarily scientific management) and a macroeconomic (improving economic conditions) meaning—though the two went hand in hand in modernizing circles, as the benefits gained by individual firms by the introduction of advanced methods of production, most often inspired by the American model, should in turn extend to the economy as a whole.

Mergers and acquisitions were seen as one of the best ways of modernizing equipment—by eliminating excessive capacity, closing down inefficient units, and increasing financial capacity to undertake new investment. A number of wide-ranging amalgamations did indeed take place in the 1920s, the most notable being the formation of IG Farben (in chemicals) in 1924, of the Vereinigte Stahlwerke (United Steel) in 1926 in Germany, and of Imperial Chemical Industries (ICI) in 1926 in Britain. However, large-scale operations and the rationalization of production could also be achieved through internal growth, as happened most spectacularly in motor cars, one of the fastest growing industries of the period and a potent symbol of modern capitalism. The French manufacturer AndréCitroën, for example, increased his production from 2,500 cars in 1919—the year he started applying American methods of mass production, in particular with the introduction of assembly lines—to nearly 100,000 ten years later.

The rationalization movement was not an outright success, at least in the short term. Investment in new machinery often resulted in overcapacity, while the rigidities of new organizational structures could prove to be a handicap rather than an advantage. Citroën went into liquidation in 1934, three years after deciding to entirely rebuild his Javel plant; while the Vereinigte Stahlwerke had to be saved from bankruptcy by the German government in 1932, as its integrated vertical structure lacked flexibility in a dramatically changing business environment. Moreover, at the national level, rationalization had created overcapacity in the old industries in Germany, in particular in textiles and the heavy industries.

Success was also limited in the timid attempts at altering the social relations of production. In France, trade unions were not recognized as negotiating partners until 1936. In Germany, war and, especially, demobilization amid a revolutionary climate led to significant changes: the recognition of trade unions by employers, collective bargaining, and the eight-hour day were the main outcomes of the Stinnes-Legien agreement of 15 November 1918, together with the establishment of a "working community" to implement the agreement. However, relationships between capital and labor soon became very strained, with employers eager to put an end to the labor legislation of the Weimar Republic. In Britain, a number of initiatives were taken to bring together employers and unions, culminating in the Mond-Turner talks of 1928, which however fell short of achieving long-term consultation and cooperation.

In any case, any hopes of modernization that might have been entertained in the 1920s were swept aside by the depression of the 1930s, which shook the very foundations of capitalism. Industrial production in Europe slumped by 28 percent between 1929 and 1932 (and by as much as 39 percent in Germany) and exports by 40 percent, while unemployment soared to between 15 percent (France) and 44 percent (Germany) of the working industrial population in 1932.

The crisis was at first met by deflationary policies (as no other options were available within the constraints of the gold standard if exchange parity was to be maintained), with little success and sometimes devastating effects, as in Germany under Heinrich Brüning, the Reich's chancellor from March 1930 to May 1932. Brüning's drastic measures, including budgetary cuts and tax increases, intended to lower German prices in order to boost exports, only made matters worse.

Reflationary measures were first taken in Britain after the pound left, somewhat unwillingly, the gold standard in September 1931 and was devalued by some 30 percent, thus making British exports more competitive. With a floating currency, though maintained at a competitive rate by the Bank of England through the Exchange Equalization Account, interest rates could be substantially lowered. This policy of cheap money was a the root of the economic recovery of the 1930s, stimulated by the boom in the building industry and the growth of the consumer goods industry, mainly based in London and the southeast of the country, in contrast to the countries that remained in the gold standard, the so-called "gold bloc,"

1932 1935 1937
Britain89113130
France747281
Germany61100127
Belgium8599101
Netherlands8491113

which included France, Belgium, the Netherlands, and Switzerland (table 3).

Recovery in Germany took place within a different economic and political context. The economic policy of the Nazi regime, in power since January 1933, was mainly based on autarky (a policy of establishing a self-sufficient and independent national economy); the growth of capital goods industries, in the first place armaments; and the state's authoritarian and direct intervention in economic affairs (45 percent of gross investment in industry between 1933 and 1938).

France's attempts at reflating its economy came much later, with the electoral victory of the Popular Front in May 1936. The new left-wing coalition did not seek to alter the structure of French capitalism (only the armament industries came into public ownership, while the state took a 51 percent stake in the newly created SNCF, the national railway company), but tried to stimulate demand by increasing purchasing power. Salaries were increased by 7 percent to 15 percent (amid of a wave of sit-down strikes), together with the introduction of paid holidays and the forty-hour week, at the Matignon Accords of June 1936, and the franc was finally devalued in September. These measures, however, failed to revive the French economy.

World War II at first boosted the economies of the belligerent countries (especially Britain, which engaged in a total war effort from an early stage and, unlike Germany and Italy, did not end up defeated and in a state of total devastation), as well as the neutral countries (in particular Sweden and Switzerland); while the occupied countries (in particular France, Belgium, and the Netherlands)

Britain115
France54
Netherlands52
Germany57
Italy49
United States172

suffered from systematic economic exploitation (table 4). By the end of World War II, the gap between Europe and America had reached an all time high: in 1950 Western Europe's per capita GDP was just over half that of the United States, whereas it had never fallen below two-thirds in previous decades. Even more than the World War I, World War II intensified state intervention in the economy. This time, the effects were to be longer lasting.

GROWTH AND REGULATION

The thirty years following World War II were the golden age of economic growth in Europe. Following postwar reconstruction, real GNP and GNP per head increased at an average annual rate of respectively 4.6 percent and 3.8 percent between 1950 and 1973, twice as fast as the secular trend. In the words of Andrew Shonfield, "capitalism converted from the cataclysmic failure which it appeared to be in the 1930s into the great engine of prosperity of the postwar Western world" (Shonfield, p. 3).

Several explanations have been given for this outstanding postwar expansion. In the first place, it took place in a far more stable and collaborative international context, despite the Cold War, with the founding of the United Nations in 1945 and the setting up of a series of multilateral organizations; the opening up of borders, especially in the field of international trade once the General Agreement on Tariffs and Trade (GATT) had come into force in 1947; and by introducing a more flexible fixed exchange rate system and international monetary cooperation with the foundation of the International Monetary Fund at the Bretton Woods Conference in July 1944.

European integration was another favorable factor, starting with the formation of the Organisation for European Economic Cooperation (OEEC) in 1948 to organize the distribution of the American aid through the Marshall Plan; then with the setting up of the European Coal and Steel Community (ECSC) in 1952 between France, Germany, Italy, Belgium, the Netherlands, and Luxembourg; and finally, and especially, with the creation of the European Economic Community (EEC) through the signing of the Treaty of Rome by the same six countries in March 1957. Greater European openness provided a competitive business and economic environment, while the establishment of an enlarged common market offered further incentive for investment, one of the main determinants of economic growth during the period.

Yet in the final analysis, the golden age of economic growth can best be explained by the dilapidated state in which Europe found itself after the war, which gave it a huge potential for catching up with the world leader, namely the United States. Catch-up and convergence theories also help to explain the differences between European countries, in particular between Britain and Continental Europe, as countries with levels of income and productivity closer to those of the United States grew at a slower rate, leading to a far greater degree of convergence between European countries by the early 1970s (table 5).

Catching up with the United States was mainly done through technology transfers, starting with the Marshall Plan, which provided not only for the delivery of machinery, but also for the visit of "productivity missions" to the United States, in order to enable groups of business executives, civil servants, trade unionists, and others to observe on the spot American production and management techniques. More generally, European capitalism embraced during the 1950s and 1960s the type of society that had developed in the United States since the 1920s, based on mass production and mass consumption, as witnessed, for example, by the growth of the automobile industry (the United States produced eight times as many cars as Britain, France, Germany, and Italy together in 1929, but only twice as many in 1957), household appliances, and other consumer durables. European businesses also adopted American managerial practices. They grew larger, became more diversified, and, in order to face up to new challenges, increasingly turned to

GDP per head 1950 (in 1990 dollars) GDP per head 1973 (in 1990 dollars) Growth per year of GDP/head 1950–1973 (percent)
Britain6,84711,9922.5
Netherlands5,88012,7633.4
Belgium5,34611,9053.5
Germany4,28113,1525.0
Italy3,42510,4095.0
United States9,57316,6072.4

the multidivisional structure (a decentralized form of organization consisting of autonomous divisions, each of them corresponding to the firm's main product lines), often on the advice of the American consulting firm McKinsey. To be sure, this "Americanization" was a complex and in many respects hybrid process, with specific forms of adaptation depending on countries and industries, but it undoubtedly played a role in Europe's post-war revival.

Changes in the structure of employment were both a cause and a reflection of economic growth and European convergence in the postwar years. The share of agriculture in total employment fell drastically, not only in Italy and France, but also in Germany; the share of industry grew closer between European countries; while the highest increase was that of the tertiary sector (table 6). Interestingly, the major gains in productivity vis-à-vis the United States, which in the last analysis are at the root of Europe's faster economic growth, appear to have been made not so much in industry, as on the one hand in services, and on the other hand through the massive transfer of labor from agriculture to industry.

European capitalism was far more state oriented during the third quarter of the twentieth century than ever before (except in wartime) or after. In 1945, unlike 1918, there was no wish to return to the prewar order: laissez-faire and deflationary policies had proved unable to solve the Depression, especially mass unemployment. Moreover, a theoretical framework for a new approach was provided by John Maynard Keynes's General Theory of Employment, Interest, and Money, published in 1936. For Keynes, governments should intervene, through a contracyclical policy, in order to make up for the failure of market mechanisms, raising aggregate demand during the recession phase of the business cycle, and decreasing it during the expansion phase, using fiscal policy and monetary policy as its main instruments for intervention. Budgetary deficit, public investment, and social policy (with the development of the welfare state) were also part of a set of economic policies that came to be known as Keynesianism.

Beyond contracyclical policies, a system of "mixed-economy" was set up in European countries, combining government intervention with state ownership of a significant chunk of business activities and enterprises. A series of nationalizations took place after the war, in particular in Britain and France. The move was essentially political, with the Labour Party coming to power in 1945 in Britain, and a more general consensus toward state control in France, reinforced by the weight of the Communist Party and more generally the Resistance in French politics. In 1945 and 1946, in both countries, coal mining, electricity, gas, air transport, railway companies (already nationalized in 1936 in France), and the central bank were transferred to state ownership, in addition to the iron and steel industry in Britain, and the main commercial banks and insurance companies, as well as the car manufacturer Renault in France.

State ownership was even greater in Italy, with the formation of the Instituto per la Ricostruzione Industriale (IRI) in 1933, which controlled most of iron and steel, mechanical and electrical engineering, and shipbuilding as well as the country's three largest banks. And it should not be underestimated in Germany, where part of the manufacturing industry, besides public utilities, transport, and communication, was already in state hands, with 50 percent of the automobile industry (through Volkswagen direct ownership) and 20 percent of coal, iron and steel, shipbuilding, and chemicals (through state holding companies such as VEBA or VIAG).

A degree of economic planning was another characteristic of European capitalism in the postwar years. This was particularly the case in France, where the quadrennial economic plan, starting with the Monnet Plan in 1946, became the principal

Agriculture Industry Services
1950 1973 1950 1973 1950 1973
Britain5.12.946.541.848.455.3
France28.511.034.838.436.750.6
Germany22.27.243.046.634.846.2
Italy45.417.828.638.126.044.1
Belgium10.13.846.839.543.156.7
Netherlands13.95.740.235.745.958.6

tool of government intervention. Based on a wide consultation of the various economic interests, the plans established a series of indicative industrial priorities, which the government was nonetheless able to implement through a combination of budgetary measures and fiscal incentives. In Britain, attempts at emulating French economic planning in order to improve economic growth in the early 1960s remained elusive. In Germany, the heritage of organized capitalism survived in the social market economy that developed after the war, based on the long-term relationship between banks and industry and, unlike Britain and France, an independent central bank and codetermination (Mitbestimmung) in enterprises, in other words the representation of labor on the supervisory board of large enterprises.

Though a German institution, codetermination points to the greater integration of labor into European capitalism that occurred during the period. The social relations of production came to be organized, at the firm level through a works council, established, in most European countries, in large and medium-sized enterprises; and at the industry or national level, through collective bargaining. Industrial conflicts, however, in particular strikes, differed both quantitatively and qualitatively between countries, being less numerous but longer in northern and central Europe, and more frequent and often politically motivated, though shorter, in southern Europe (France and Italy).

Did the European economies converge during the golden age? There is no clear-cut answer to the question. There was a clear convergence in levels of income and productivity, in the structure of employment, and in the overall influence of the state in economic affairs. On the other hand, the movement was less evident as far as socioeconomic structures are concerned. Business organization is a case in point. Corporate structures, for example, retained their national characteristics despite the widespread adoption of American management techniques with, for example, a dual board of directors (executive board and supervisory board) in Germany and a single one in Britain and France. Small and middle-sized companies played a greater role in Germany (the Mittelstand) and Italy (industrial districts) and are often considered to have contributed more significantly to the two countries' economic performance than large corporations. Differences were also strong in the recruitment of business executives (mostly from the corporate sector in Britain and Germany, and from the state administration in France); and more generally in business cultures and value systems (internal hierarchy, sociability, and so on) within corporations.

GLOBALIZATION AND DEREGULATION

Economic growth slowed down after 1973, returning to its secular trend (table 1), mainly as a result of the weakening of Europe's catch-up potential, whatever the role played at the same time by other factors, including the two oil crises of 1973 and 1978. At the same time the end of the fixed exchange rate system in 1973 gave a new impetus to international capital flows—the first clear signs of a globalization of the world economy, which picked up in the 1980s and especially the 1990s.

As during the period prior to 1914, it was international capital flows that formed the heart of globalization, though other phenomena, such as enhanced transport facilities, faster communications, and increased trade should not be discounted. Recent estimates put the supply of capital invested abroad at some $29,000 billion in 2000, a tenfold increase in twenty years. This upsurge in capital exports was directly linked to the progressive liberalization of the financial markets, which was part of a much broader trend: the growing influence, firstly in the Anglo-Saxon countries, and then elsewhere in the world, of a neoliberal view of the economy and of society.

In this respect, at least symbolically, the coming to power of Margaret Thatcher (b. 1925) in the UnitedKingdomin1979andRonaldReagan (1911–2004) in the United States in 1981 marked the beginning of this new vogue. Some resistance has certainly been encountered, attitudes have shifted and policies have changed over the following decades; but the fundamental economic dispensation—the smaller state and the strengthening of market mechanisms—has not really been challenged.

Market liberalization meant first of all the free movement of capital: exchange controls and other measures aimed at curbing both capital outflows (in Britain, France, and the United States) and capital inflows (Germany, Switzerland, Japan) were mostly dismantled during the 1980s. It also meant the deregulation of the financial markets, with increased internationalization and competition, epitomized in the "Big Bang" that took place in the city of London in October 1986.

The 1980s were also the years when corporate finance, that is to say all of the activities relating to organizing and financing mergers and acquisitions, really took off. Underlying this trend was the conviction, widespread in the United States by the late 1970s, that the interests of company shareholders were not always well served by their salaried managers. From this viewpoint, a takeover bid, if necessary unfriendly and addressed directly to shareholders, seemed to be the best penalty for poor management and the threat of such an action the best way of compelling management to remain vigilant. A wave of buying and selling businesses and of mergers and demergers followed, first in the United States, then in Britain, thus giving rise to the term "Anglo-Saxon capitalism," meaning dominated by market forces.

But it was the Thatcher government's privatizations that more than anything characterized the 1980s in England. Assets in excess of 40 billion pounds (75 billion dollars) were put on the market between 1981 and 1991, more than half of which belonged to public utilities (telephone, gas, water, and electricity), ushering in a new form of popular capitalism—by the end of the process, Great Britain had more than 8.5 million individual investors, that is to say one fifth of the adult population. Privatizations were more limited in France (they brought the state some 70 billion francs [approximately 13 billion dollars] between 1986 and 1988) and affected enterprises in the competitive sector, mostly nationalized in 1982, and over which the authorities continued to exert a degree of control.

The wave of mergers became even more intense during the 1990s, with hostile takeovers and stockmarket battles beginning to hit continental Europe, as exemplified by the takeover in 2000 of Mannesmann, Germany's second industrial group, by the British mobile telephone operator Vodafone after a battle that shook the very foundations of the Rhineland model of capitalism , distinguished by the dominating role of the banks and the preeminence of management over shareholders.

At the turn of the twenty-first century, European capitalism was facing a number of new challenges. Firstly, while firmly engaged in the third industrial revolution (information technologies, biotechnologies), Europe was still lagging behind the United States both in terms of innovative capacities and the development of large and competitive business enterprises. Interestingly, there were no significant differences between European countries even though, and contrary to the second industrial revolution, Britain appeared somewhat more in the vanguard than Germany. Secondly, while still one of the richest regions of the world, and in some respects the most pleasant one in which to live, Europe appeared to be struggling to combine international competitiveness and social welfare. The contradiction might have been more apparent than real and the outcome still uncertain, yet the process of globalization, competition from newly industrialized or industrializing countries, with delocalization and high unemployment in several countries as its most obvious effects, strained the welfare state in Europe. Thirdly, though European economies had been brought closer together by further integration (and a common currency for those that adopted the euro in 1999), a European model of capitalism, combining the competitiveness of a knowledge-based economy with a socially inclusive society, seemed elusive, not only because of the effects of globalization, but also because diverging types of capitalism—Anglo-Saxon and Germanic—appeared to be at loggerheads. In 2004 uncertainty remained as to which type would, and should, prevail. The outcome is not for the historian to predict, though it is unlikely that the fate of European capitalism in the twenty-first century will lie so much in overcoming this tension as in solving new and unexpected problems with which it will undoubtedly be confronted.

See alsoAutomobiles; Economic Miracle; European Coal and Steel Community (ECSC); European Free Trade Association.

BIBLIOGRAPHY

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Broadberry, Stephen. The Productivity Race: British Manufacturing in International Perspective, 1850–1990. Cambridge, U.K., 1997.

Cassis, Youssef. Big Business: The European Experience in the Twentieth Century. Oxford, U.K., 1997.

Chandler, Alfred D., Jr. Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, Mass., 1990.

Chandler, Alfred D., Jr., Franco Amatori, and Takashi Hikino. Big Business and the Wealth of Nations. Cambridge, U.K., 1997.

Crafts, Nicholas, and Gianni Toniolo, eds. Economic Growth in Europe since 1945. Cambridge, U.K., 1996.

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. New York, 1996.

Feinstein, Charles H., Peter Termin, and Gianni Toniolo. The European Economy between the Wars. Oxford, U.K., 1997.

Hall, Peter A., and David Soskice, eds. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford, U.K., 2001.

Hardach, Gerd. The First World War, 1914–1918. Berkeley, Calif., 1977.

Kaelble, Hartmut. A Social History of Western Europe, 1880–1980. Dublin, 1989.

Kindleberger, Charles Poor. The World in Depression, 1929–1939. Berkeley, Calif., 1973.

Maddison, Angus. Dynamic Forces in Capitalist Development: A Long-Run Comparative View. Oxford, U.K., 1991.

——. Monitoring the World Economy, 1820–1992. Paris, 1995.

Milward, Alan S. War, Economy, and Society: 1939–1945. Berkeley, Calif., 1977.

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Pollard, Sidney. Britain's Prime and Britain's Decline. The British Economy, 1870–1914. London, 1989.

Shonfield, Andrew. Modern Capitalism. London and New York, 1966.

Van der Wee, Herman. The World Economy, 1945–1980. Harmondsworth, U.K., and New York, 1986.

Zeitlin, Jonathan, and Gary Herrigel, eds. Americanization and Its Limits: Reworking US Technology and Management in Post-War Europe and Japan. Oxford, U.K., 2000.

Youssef Cassis

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Market Economy

Market Economy

What It Means

A market economy is a system in which people voluntarily exchange goods and services for a price. Businesses and consumers, not the government, decide how much of a good or service, such as ice cream or furniture repair, is produced and purchased. Other terms for market economy are free-market economy and free-enterprise system.

Market economies are called free markets because individuals are free to pursue their economic self-interest, choosing for themselves which goods to buy or sell and how much money they are willing to pay or charge for an item. Ideally free trade between consumers and producers results in the greatest abundance of goods for that society. Market economies depend on what are known as market forces. The level of consumer demand for goods and services is an example of a market force, as is the level of goods and services supplied to consumers.

A pure market economy, which would imply an absence of taxation or any other type of regulation, is possible only in theory. The reality of the market system is that while it allows market forces to influence most of the economic activity, it relies on the intervention of the government for its very existence. The government protects the right to private property, for example, allowing people to own businesses and to seek profit. It operates a court system where laws can be enforced, maintains an army to defend the country, establishes a system of money, and creates other organizations and rules that are needed for markets to function. The interplay between free markets and governments is complex. Political debate often centers on how much the government should be involved in the market system.

When Did It Begin

Aspects of the market economy system have existed in the trading systems of nations for thousands of years, but it was in the nineteenth century that organized political support for the free market was established and that ideas essential to a free-market economy, such as for-profit enterprises and entrepreneurship, became more familiar. A for-profit enterprise is a business venture that seeks to make a profit, and an entrepreneur is someone with the creative ability required to organize a business in ways that produce profits.

At the same time that ideas about the market economy were taking shape, Karl Marx, a nineteenth-century German scholar, developed a philosophy known as Marxism. Marx argued that the value of a product came from the labor a worker put in it, and thus the profit of a business (when its revenue exceeded its costs) belonged not to the business owner but to the workers. He described a classless society in which all methods of production were owned in common (by everyone), though initially by the government in a transition phase called socialism. Many of Marx’s philosophies were supported in the communist societies of the Soviet Union, China, and other countries during the mid-twentieth century, while the United States, Canada, and Western Europe, for example, built market economic systems. Between the late twentieth and the early twenty-first centuries, most communist countries had found government-led economies to be cumbersome and had chosen to move toward free-market systems. The market economy subsequently became by far the dominant economic model throughout the world.

More Detailed Information

The concepts of supply and demand are central to the idea of a market economy. Demand is defined as the quantity of a product or service that is desired by buyers over a range of prices. For example, a consumer may be willing to purchase two pounds of rice if the price is $.60 per pound. The same consumer may be willing to purchase only one pound of rice if the price is $1.00 per pound. Several factors influence the quantity a consumer is willing to buy of a good. These factors are the price of the good, the consumer’s level of income, his or her personal tastes, the price of substitute goods (goods that can be used in place of other goods, in the way that margarine can be used in place of butter), and the price of complementary goods (goods that are normally consumed in combination with another good; when more hot dogs are bought, more hot dog buns are also bought).

Supply is defined as the quantity of a good or service that the producers of the market are able and willing to provide to consumers over a range of prices. For instance, perfume producers in an economy may be willing to sell 1 million ounces of perfume if the price is $50 per ounce, but they would produce substantially more if the price were $100 per ounce. The main factors determining supply are the market price of the good or service, the cost of producing it, and the level of competition.

The relationship between demand and supply has a large impact on the forces that determine the allocation (the planned distribution) of resources. In the theory of a market economy, consumer demand for goods and services and the supply of those goods and services will be in balance, or what is known as equilibrium, such that resources are used (or distributed) in the most efficient way possible. An efficient resource allocation means that goods are produced (or supplied) at a level that effectively meets consumer demand for them.

Market economies exist all over the world, although the government of each country restricts pure free-market practices in different ways. For example, the United States does not allow monopolies, in which one company exclusively controls the production of a service or product. Singapore and Ireland are examples of countries that place fewer restrictions on free-market practices.

A market economy contrasts with what is called a planned economy, one in which a government or other authority determines what and how much will be produced and what prices will be. In a planned economy the government intervenes in the open exchange of goods by doing such things as fixing prices, issuing quotas (limits) on imported goods, and subsidizing (providing financial resources to) industry. The main difference between market economies and planned economies is not the level of government influence but whether government influence is used to restrict the decision-making of private individuals and businesses. For example, if the government of a market economy wants more paper, it collects taxes from taxpayers and then purchases the paper at market prices. If the government of a planned economy wants more paper, it orders paper to be produced by paper companies and then sets the price using a governmental policy, or mandate. In general, socialist economies promote planned economic systems, and capitalist economies promote market economic systems.

Milton Friedman (1912–2006), one of the most influential twentieth-century American economists, was a strong advocate of curbing the role of government in the free market in order to create political and social freedom. Friedman believed that the economic freedom of the individual, which was entwined with the political and social freedom of the individual and the society, could be reached only in a market-oriented economy. Stated another way, countries that restricted economic freedom also tended to restrict the political freedom of their citizens.

Recent Trends

In the 1980s most of the planned economies in the world began moving toward free markets. In 1987 the Soviet Union initiated economic reforms, called perestroika, intended to revive its weak, government-led economy. These reforms introduced elements of market competition and encouraged free expression, but they eventually led to the downfall of the government itself. Beginning in 1978, the People’s Republic of China created what was termed a “socialist market economy,” which sought to combine the flexibility of a market economy with the political control of its socialist government. Using this system, China opened trade with the outside world, began to allow markets to determine prices, and decreased the state’s role in distributing such resources as food. Unlike the reforms in the Soviet Union, the reforms China put in place were successful, and the Chinese economy grew rapidly. The standard of living of most Chinese people also improved dramatically. Many economists believe that the Soviet focus on developing heavy industry, which affects only a small group of businesses, kept its reforms from succeeding. In China the emphasis was on light industry and agriculture, both of which produce goods that are consumed by a large portion of the population.

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