Capitalism

Capitalism refers to

a set of economic practices that became institutionalized in Europe between the 16th and 19th centuries, especially involving the formation and trade in ownership of corporations (see corporate personhood and Companies) for buying and selling goods, especially capital goods (including land and labor), in a relatively free (meaning, free from state control) market
a set of theories that developed in the 19th (in the context of the industrial revolution) and 20th (in the context of the Cold War) centuries meant to justify the private ownership of capital, to explain the operation of such markets, and to guide the application or elimination of government regulation of property and markets
and a set of beliefs about the advantages of such practices.

Capitalism evolved from the European economic practices before it, (see Mercantilism and Feudalism), has continued to evolve ever since, and is the dominant economic system in the world today. Depending on how one defines "capitalism," there is continuing debate over the nature and scope of its global influence.

Capitalism as an economic system

There is much debate of how to define capitalism. Some proponents of capitalism (like Freidman) tend to emphasise the role of efficient free markets, which promote individual freedom and democracy. For many (like Wallerstein), it hinges on the elaboration of an economic system in which goods and services are traded in markets, and capital goods belong to non-state entities, onto a global scale. For others (like Marx), it is defined by the creation of a labor market.

According to Marx, the commoditization of labor led both to commodity fetishism and an expansion of the system of commodities. Marx observed that some people bought commodities in order to use them, while others bought them in order to sell elsewhere at a profit. Much of the history of late capitalism involves what David Harvey called the "system of flexible accumulation" in which more and more things become commodities the value of which is determined by their exchange rather than use. Thus not only are pins commodities; shares of ownership in a factory that makes pins become commodities; then options on shares become commodities; then portions of interest rates on bonds become commodities, and so on.

The following example introduces many of the ideas involved. When starting a business, the initial owners typically provide some money (the Capital) which is used by the business to buy or rent some means of production. For example, a piece of land and a building may be bought or rented, machinery may be bought, and workers (Labour) may be hired. If more money is needed than the initial owners are willing to provide, it is possible to borrow a limited amount of extra money with a promise to pay it back with interest - in effect more Capital is being rented. The business then has a degree of legal authority, and thereby hopefully control, over a set of factors of production (as they are called in economics). The business can be registered as a corporate entity, meaning that it can act as a type of virtual person in many matters before the law. The owners can pay themselves some of the income derived from the business (Dividends), sell shares in the corporate entity, or they can sell all of the equipment, land, and other assets, and split the proceeds between them.

Many of these features and techniques of business workings existed before capitalism. There is no universal agreement on which of them, or which set of them define capitalism. However, many people agree that it was at the time when share trading in corporate bodies such as companies became common and widely understood that capitalism can be said to have begun, even though there is often disagreement that it was the share trading itself that defines capitalism. Such share trading first took place widely in Europe during the 17th century and continued to develop and spread thereafter, although the word Capitalism itself did not come into use until the 19th century.

All real capitalist economies have had coporations working along the lines of the above example existing in parallel with other organisations such as governments, sole traders, partnerships and even sometimes other organisations such as co-operatives and credit unions.

Examples of features that have been added to capitalism over the above example business include the following:

Government Bonds.
Stock Exchanges to facilitate the trade in Stock Markets and other financial instruments such as shares and bonds.
Non-government Bonds.
Investment funds
Stock Market indexes.
Margin buying.
Short selling.
Companies that specialise in the rating of financial instruments.
Floating currency exchange rates.
Warrants and Options.
Futures trading - over financial instruments, commodities, and currencies.
Index funds.
Exchange traded funds.

Inreases in communications technologies have lead to increases in the number and availability of financial instruments, and the ease of trading.

Under Capitalist systems, to a large degree, authority over the units of productive capacity resides with the owners. Within legal limits and the financial means available to them, the owners of each unit can decide how the unit will operate. This normally includes deciding the following things (among many others):

which land production will take place on,
how many people will be employed,
what activities employees will do,
which machines and tools will be used for production.

In larger produtive units, authority is usually delegated in a hierarchical system of management. Ownership may be shared among many people, and in such cases, the owners generally have votes in the excercise of authority in proportion to the size of their share of ownership.

Importantly, the owners receive any profits or proceeds generated by the productive capacity that they own. The price at which ownership of productive capacity can be sold is generally in rough proportion to the profits currently being generated and/or expected to be generated by that productive capacity in the future. This provides a financial incentive for owners to excercise their authority in a way that increases the productive capacity of what they own rather than to use it for other purposes.

Characteristics of Capitalist Economies

Growth (in the economic sense): capitalist economies have shown an erratic but sustained tendency towards economic growth. They have on occasion been through near disastrous periods (such as the Great depression), and some have argued that it has only been government intervention that has prevented capitalist economies from collapsing. Some of these argue that it is only government intervention that has enabled capitalist economies to ever grow at all, or that economic growth in capitalist economies is not due to capitalism itself, but exists despite capitalism - perhaps due to some other reason such as increased scientific knowledge, some form of imperialism, or whatever. Yet others argue that growth, or often growth insufficiently guided by democracy, is a bad thing. Further discussion can be found on these points below in the Critisisms of Capitalism section. Nevertheless, good or bad, because of or despite capitalism, it can be seen from history that there has been a sustained tendency for capitalist economies to grow over time.

Distribution of Wealth: capitalist economies have shown an uneven distribution of wealth. Typically between 0.5% and 1% of people own more than half of productive capacity, if not half of all wealth, and can if they desire sell it and spend the resulting money on consumer items. Studies have shown a roughly exponential or power-law wealth distribution with the peak in the distribution at or near zero with less people owning progressively higher wealth. Such distributions result in some people owning hundreds of thousands, or sometimes millions of times more than average. This seems to strike many people as being unfair and/or dysfunctional. Most characteristics of people, such as height or weight, and it might be surmised people's productivity, are distributed according to a bell shaped curve with a peak at the average and few people far on either side - for example there are no people 100,000 times as high as average, in fact there are none even 2 times as high as average. It is not agreed as to why capitalism does not distribute wealth in a bell shaped fashion or why it tends to collect it in such an unequal fashion, although some argue that collection of wealth in relatively few hands serves a function that in the end benefits all. This issue is further discussed below.

Evolving network structure: capitalist economies have large numbers of companies and people free to enter into many types of arrangements with each other. The economy reacts to various changes in technologies, discoveries, and other situations, often in unforseen or unforseable ways that nobody may have counted on or approved. Some people say that this leads to chaotic fluctuations in the economy and society, and is not necessarily good, or that it adds unnecessary risk to most activities. Others see the evolving relationships in the economy more as a positive adaptation and tendency towards improvement.

Criticisms of Capitalism

Marxists and others criticize capitalism for enriching capitalists (owners of capital) at the expense of workers without necessarily working themselves ("the rich get richer, and the poor get poorer"), and for the degree of control over the lives of workers enjoyed by owners. Supporters of capitalism counter this criticism by claiming that ownership of productive capacity provides motivation to owners to increase productive capacity and so generally increase the average material wealth ("we all get richer").

Marxists believe that the capitalism allows capitalists - the owners of capital - to exploit workers. The existence of private property is seen as a restriction on freedom. Marxists also argue that capitalism has inherent contradictions that will inevitably lead to its collapse. Capitalism is seen as just one stage in the evolution of the economy of a society.

Marxists also often argue that the structure of capitalism necessarily leads to unjust exploitation of workers, regardless of whether or not the political system is one of an elected democracy or not. For this reason Marxists typically emphasise the capitalist economic system of western countries rather than the democratic political system. A capitalist system is an economic system - although often associated with democratic systems, a capitalist system could also function under an unelected government.

In China differences in terminology sometimes confuse and complicate discussions of Chinese economic reform. Under Chinese Marxism, which is the official state ideology, capitalism refers to a stage of history in which there is a class system in which the proletariat is exploited by the bougeiosie. In the official Chinese ideology, China is currently in the primary stage of socialism with Chinese characteristics. However, because of Deng Xiaoping's dictum to seek truth from facts, this view does not prevent China from undertaking policies which in the West would be considered capitalistic including privatizing factories and encouraging the growth of the private sector.

Capitalism as an ideology

As with many common words, and most particularly ideologically laden words, "capitalism" has many meanings, and there is a lot confusion when using it as to whether it means any particular meaning, or whether it is just a slogan or insult used without particular meaning intended (or worse, with confusion intended).

"Capitalism" as a phenomenon (e.g., the system of the private ownership of capital) is certainly different from "capitalism" as an ideology (the philosophical advocacy of that system--not the same kind of notion at all).

Opponents of capitalism sometimes deny that these represent subtantially different things, or say they go hand-in-hand. Although it is arguable whether or not two meanings of the word "capitalism" of the same kind are somehow "equivalent" under someone's subjective notion of equivalence, for the sake of not making a straw man argument when accusing someone else to be a proponent of capitalism, these different concepts must be clearly distinguished.

Capitalism and political ideologies

There are many different and opposite ideologies that value capitalism:

libertarianism (sometimes also called classical liberalism) defends a "pure" form of capitalism with minimal State intervention, e.g. Natural Capitalism which emphasizes the role of private business in seeking energy and material efficiency, and the role of government in making it difficult or expensive to reduce biodiversity or pollute the commons - but little else.
conservatism varies depending on countries in its specific stances, but in western countries, usually defends something not unlike the status quo of current capitalist practices (see political conservatism).
mercantilism defends state intervention to protect domestic commerce and industries against foreign competition (see protectionism).
social democracy argues for extended state regulation and partial intervention in a capitalist background (see welfare state, political liberalism, liberal democracy, new liberalism).

Many different and opposite ideologies fight capitalism and argue for collectivism, including:

socialism argues for partial State control of the economy, with tolerated areas of capitalism.
fascism argues for extensive State control of economy, with delegation of its powers to complacent capitalists.
communism argues for collective ownnership of the means of production, and the overthrow of the state.
libertarian socialism argues for collective control of economy without the need for a State.

Arguments for and against capitalism

Since there are so many divergent ideologies backing or fighting capitalism, there is no possible agreed upon argument list for or against it. Each of the above ideologies makes very different claims for or about capitalism. Some ideologies refuse to use the word at all.

There seem to be four separate and distinct questions about capitalism which have clearly survived the 20th century and remain hotly debated today. Certain thinkers claim or claimed to have simple answers to these questions, but political science generally sees them as scales or shades of grey:

Is capitalism moral? Does it actually encourage traits we find useful or appealing in human beings? Yes: Ludwig von Mises, Ayn Rand, Robin Hanson No: John McMurty, Karl Marx

Is capitalism ethical? Can its rules and contracts and enforcement systems be made wholly objective of the people administering them, to a greater degree than other systems? Yes: Buckminster Fuller, John McMurty, Friedrich Hayek No: Karl Marx, Peter Kropotkin

Is capitalism efficient? Given whatever moral purposes or ethical standards it might serve, can it be said to allocate energy, material resources, or human creativity better than any of the alternatives? Yes: Ludwig von Mises, Paul Hawken, Joseph Schumpeter No: Peter Kropotkin

Is capitalism sustainable? Can it persist as a means of organizing human affairs, under any conceivable set of reforms as per the above? Yes: Buckminster Fuller, Paul Hawken No: Joseph Schumpeter, Karl Marx

Why does no one agree what capitalism is?

It's hard to answer this objectively. Apparently there has never been a clear agreement about the linguistic, economic, ethical and moral implications, that is, the "political economy" of capitalism itself.

Rather like a governing political party that everyone seeks to control, regardless of ideology, the definition of "capitalism" at any given time tends to reflect the current conflicts between interest groups.

The non-obvious combinations demonstrate the complexity of the debate. For instance, Joseph Schumpeter claimed in 1962 that capitalism was more efficient than any alternative, but doomed due to its complex and abstract rationale which the ordinary citizen would not ultimately defend.

Also, the overlapping claims confuse most debaters. Ayn Rand made an original defense of capitalism as a moral code, but her arguments for its efficiency were not original, and selected to support her moral claims. Karl Marx believed capitalism efficient but unfair at the administration of an immoral purpose, and thus ultimately unsustainable. John McMurty, a current commentator within the anti-globalization movement, believes it has become increasingly fair at the administration of this immoral purpose. Robin Hanson, another current commentator, asks if fitness and fairness and morality can ever really be separated by other than electoral political means?

In whose interest is capitalism ?

Finally, the arguments appeal strongly to different interest groups, and often support their positions as "rights".

Currently recognized property owners, especially corporate shareholders and holders of deeds in land or rights to exploit natural capital, are generally recognized as advocating extremely strong property rights.

However, the definition of capital has broadened in recent years to recognize and include the rationales of other major interest groups: artists or other creators who rely on copyright law, legal patent and trademark holders who improve what they call intellectual capital, workers who are largely trading in their own less creative labor guided by a body of shared and imitative instructional capital - the trades themselves, all have reasons to prefer status quo property law over any given set of proposed reforms.

Even judges, mediators or administrators charged with fair execution of some ethical code and the maintenance of some relationship between human capital and financial capital within a capitalist representative democracy, tend to have strong self-interest reasons to argue for one view or another - typically, that view that assigns them a meaningful role in the capitalist economy.

Karl Marx made the strong claim that this role actually affects their cognition, and leads them inexorably to irreconcilable points of view, i.e. that no agreement about capitalism was possible by "class collaboration", and "class struggle" between these defined it. This view was advocated by many revolutionary movements of the 20th century, but was often abandoned in practice as it seemed to lead to "class war", endless violence between those with irreconcilable points of view.

Today, even those parties traditionally opposed to capitalism, e.g. the Chinese Communist Party of Mao Zedong, see some role for it in the development of their society. Debate focuses on incentive systems, not on the overall moral structure or ethical clarity of "capitalism".

What is capitalism good for?

One important modern argument is that capitalism simply isn't a system, merely a set of questions, challenges, and assertions regarding human behavior. Similar to biology or ecology and its relationship to animal behavior, made complex by human language, culture and ideas. Jane Jacobs and George Lakoff argued separately that there was a Guardian Ethic which was fundamentally related to nurturing and protection of life, and a Trader Ethic more related to the unique primate practice of trade. Jacobs thought that the two were made and kept separate in history, and that any collaboration between them was corruption, i.e. any unifying system that claimed to make assertions regarding both, would simply be serving itself.

Other doctrines focus narrowly on the application of capitalist means to natural capital (Paul Hawken) or individual capital (Ayn Rand) - assuming a more general moral and legal framework which discourages these same mechanisms when applied to non-living beings coercively, e.g. "creative accounting" combining individual creativity with the complex instructional base of accounting itself.

Aside from the very narrow arguments advancing specific mechanisms, it is quite difficult or pointless to distinguish critiques of capitalism from critiques of Western European civilization, colonialism or imperialism. These arguments often recur interchangeably within the context of the extremely complex anti-globalization movement, which is often (but not universally) described as "anti-capitalist".