The Online Encyclopedia and Dictionary







Capitalism has been defined in various ways (see definitions of capitalism). In common usage it refers to an economic system in which land and capital are privately owned and operated for profit and where investments, production, distribution, income, and prices are determined largely through the operation of a free market rather than by centralized state control (as in a command economy). All modern Western economies contain some degree of capitalism.

Most theories of what has come to be called capitalism developed in the 18th century, 19th century and 20th century, for instance in the context of the industrial revolution and European imperialism (e.g. Smith, Ricardo, Marx), The Great Depression (e.g.Keynes) and the Cold war (e.g. Hayek, Friedman). These theorists characterise capitalism as an economic system in which prices are determined in a free market: that is, by trades that occur as a result of voluntary agreement between buyers and sellers; where a market mentality and entrepreneurial spirit exists; and where specific, legally enforcable, notions of property and contract are instituted. Such theories typically try to explain why capitalist economies tend to generate more economic growth than those subject to a greater degree of governmental intervention (see economics, political economy, laissez-faire). Some emphasize the private ownership of capital as being the essence of capitalism, while others emphasize the importance of a free market as a mechanism for the movement and accumulation of capital. Some note the growth of a global market system. Others focus on the application of the market to human labor. Others, such as Hayek, note the self-organizing character of economies who are not centrally-planned by government. Many of these theories call attention to various economic practices that became institutionalized in Europe between the 16th and 19th centuries, especially involving the right of individuals and groups of individuals acting as "legal persons" (or corporations) to buy and sell capital goods, as well as land, labor, and money (see finance and credit), in a free market (see trade), and relying on the state for the enforcement of private property rights rather than on a system of feudal protection and obligations.

Debates center on whether capitalism

  • is an actual system, or an ideal
  • has been actualized in particular economies, or if not, then to what degree capitalism exists in those (see mixed economy)
  • is historically specific (that is, that it emerged at a specific time and place), or a system that has existed in various places at various times
  • is a purely economic system, or a political, social, and cultural system as well
  • is sustainable or not
  • is rational or not
  • tends to enrich more and more people, or to impoverish more and more people.

Aside from referring to an economic or political system, capitalism may also refer to the condition of owning capital. Likewise, in addition to the term "capitalist" referring to someone who favors capitalism, capitalist also commonly refers to a person who owns and control capital.



The etymology of the word capital reveals roots in the trade and ownership of animals. The Latin root of the word capital is capitalis, from the proto-Indo-European kaput, which means "head", this being how wealth was measured. The more heads of cattle, the better. The terms chattel (meaning goods, animals, or slaves) and even cattle itself also derive from this same origin.

The lexical connections between animal trade and economics can also be seen in the names of many currencies and words about money: fee (faihu), rupee (rupya), buck (a deerskin), pecuniary (pecu), stock (livestock), and peso (pecu or pashu) all derive from animal-trade origins.

The first use of the word "capitalism" in English is by Thackeray in 1854, by which he meant having ownership of capital. In 1867 Proudhon used the term "capitalist" to refer to owners of capital, and Marx and Engels refer to the "Capitalist production system" and in Das Kapital to "Kapitalist", "capitalist" (meaning a private owner of capital). By the early 20th century the term had become widespread, as evidenced by Max Weber's use of the term in his The Protestant Ethic and the Spirit of Capitalism in 1904, and Werner Sombart's 1906 Modern Capitalism. The OED cites the use of the term "private capitalism" by Karl Daniel Adolf Douai , German-American socialist and abolitionist in the late 19th century, in an 1877 work entitled "Better Times", and a citation by an unknown author in 1884 in the pages of Pall Mall magazine.

Under the Marxist theory of ideology, a dominant economic class is believed to have its own ideology serving its class interests. The ideology of the "capitalist class" or bourgeoisie -- economic liberalism -- also came to be known as "capitalism", giving the word another meaning. This usage has been adopted outside of Marxist circles, and today many economic liberals self-describe as "capitalists", even if they are not personally involved in business investment.

History of capitalism

Main article: History of capitalism (practice)

History of theory of capitalism

Main article: History of theory of capitalism

The conception of what constitutes capitalism has changed significantly over time, as well as varying depending on the political perspective and analytical approach taken. Adam Smith focussed on the role of enlightened self-interest (the "invisible hand") and the role of specialisation in making capital accumulation efficient. Some proponents of capitalism (like Milton Friedman, Ayn Rand and Alan Greenspan) emphasize the role of free markets, which they claim promote cooperation between individuals, innovation, economic growth, as well as liberty. For many (like Immanuel Wallerstein), capitalism 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 Karl Marx), it is defined by the creation of a labor market in which most people have to sell their labor-power in order to survive. As Marx argued (see also Hilaire Belloc), capitalism is also distinguished from other market economies with private ownership by the concentration of the means of production in the hands of a few. Many others use capitalism as a synonym for a market economy.

How capitalism works

Example of Starting a Business

The following example introduces many of the ideas involved in capitalism. When starting a business, the initial owners or investors typically provide some money (the Capital) which is used by the business to buy or rent some means of production. For example, the enterprise may buy or rent a piece of land and a building; it may buy machinery and hire workers (labor-power), or the capitalist may provide the labor himself. The commodities produced by the workers become the property of the capitalist ("capitalist" in this context refers to a person who has capital, rather than a person who favors capitalism), and are sold by the workers on behalf of the capitalist or by the capitalist himself. The money from sales also becomes the property of the capitalist. The workers deposit the money into the capitalist's bank account. Once the capitalist receives this money, he or she pays the workers a portion for their labor, pays other overhead costs, and keeps the rest as profit. This profit may be used in a variety of ways --it may be consumed, or it may be used in pursuit of more profit such as by investing it in the development of new products or technological innovations, or expanding the business into new geographic territories. If more money is needed than the initial owners are willing or able to provide, the business may need to borrow a limited amount of extra money with a promise to pay it back with interest -- in effect it may rent more capital. The business is granted a degree of legal authority, and control, over a set of factors of production (as economists call them). The business can register as a corporate entity, meaning that it can act as a type of virtual person in many matters before the law (see Companies for listing of such entities). The owners can pay themselves some of the income derived from the business (Dividends), sell shares of stock in the company, or they can sell all of the equipment, land, and other assets, and split the proceeds between them.

Capitalist ownership

Traditionally, capitalist economies have had corporations working along the lines of the above example existing in parallel with other types of organisation such as governments, sole proprieterships, partnerships and sometimes cooperatives, credit unions, communes and other entities. Observers do not always agree which of these organisations, or which features of them are part of capitalism, although most often companies, or many features of their operation, are included as part of the definition.

Additionally, many of the characteristics and techniques of business workings in the above example existed before capitalism, and many have continued to be added. So this leaves much room for debate. However, many people agree that it was around the time when share-trading in corporate bodies became common and widely understood that large scale capitalism can be said to have become possible and became predominate, even though there is often disagreement that it was the share-trading itself that defined 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.

One can view shares as converting company ownership into a commodity - the ownership rights are divided into units (the shares) for ease of trading in them. In a similar way, one can view bonds as a commoditisation of debt. Other financial instruments have come into being since the early years of capitalism that have commoditised fluctuations in markets, future prices, classes of items, and many other things. Increases in communications technologies have helped facilitate an increase in the number and availability of financial instruments, and the ease of trading.

In the bulk of capitalist economies, a predominant proportion of productive capacity has belonged to corporate bodies such as companies. Therefore, to a large degree, authority over productive capacity has resided with the owners of companies. Within legal limits and the financial means available to them, the owners of each company can decide how it will operate. This normally includes deciding the following things (among many others):

  • which land production will take place on,
  • how many people to employ,
  • what activities employees will do,
  • which machines and tools to use for production.

In larger companies, authority is usually delegated in a hierarchical or bureaucratic system of management. When company ownership is spread among many shareholders, the shareholders generally have votes in the exercise of authority over the company in proportion to the size of their share of ownership.

Importantly, the owners receive most of the profits or proceeds generated by the productive capacity that they own - sometimes in the form of dividends, other times in the form of profits being re-invested in the capacity that is owned (and "capital gains"). The price at which ownership of productive capacity sells is generally the maximum of either the net present value of the expected future stream of profits or the value of the assets, net of any obligations. There is therefore a financial incentive for owners to exercise their authority in ways that increase the productive capacity of what they own. Various owners are motivated to various degrees by this incentive -- some give away a proportion of what they own, others seem very driven to increase their holdings. Nevertheless the incentive is always there, and it is credited by many as being a key aspect behind the remarkably consistent growth exhibited by capitalist economies. Meanwhile, some critics of capitalism claim that the incentive for the owners is exaggerated and that it results in the owners receiving money that rightfully belongs to the workers, while others point to the fact that the incentive only motivates owners to make a profit - something which may not necessarily result in a positive impact on society.

Characteristics of capitalist economies

A set of broad characteristics are generally agreed on by both advocates and critics of capitalism. These are a private sector, property rights, economic growth, economic mobility , unequal distribution of wealth, competition, evolving entrepreneurial networks and social arrangements, and the existence of free markets (including the labor market).

Private property rights

An essential characteristic of capitalism is the institution of rule of law in establishing and protecting private property, including, most noteablely, private ownership of the means of production. While some, such as Ayn Rand, assert that "all property is privately owned," this absoluteness is not typically asserted as a required characteristic. Private property was embraced in some earlier systems legal systems such as in ancient Rome [1], but protection of these rights was sometimes difficult, especially since Rome had no police [2]. Such and other earlier system often forced the weak had to accept the leadership of a strong patron or lord and pay him for protection. It has been argued that a strong formal property and legal system made possible a) greater independence; b) clear and provable protected ownership; c) the standardization and integration of property rules and property information in the country as a whole; d) increased trust arising from a greater certainty of punishment for cheating in economic transactions; e) more formal and complex written statements of ownership that permitted the easier assumption of shared risk and ownership in companies, and the insurance of risk; f) greater availability of loans for new projects, since more things could be used as collateral for the loans; g) easier and more reliable information regarding such things as credit history and the worth of assets; h) an increased fungibility, standardization and transferability of statements documenting the ownership of property, which paved the way for structures such as national markets for companies and the easy transportation of property through complex networks of individuals and other entities. All of these things enhanced economic growth.

Capitalism is in essential contrast to socialism in that besides embracing private property in terms of personal possessions, it supports private ownership of the means of production (compare definitions of socialism). Fidel Castro, who supports state-instituted socialism, in a speech entitled Capitalism is a Society of Wolves said: "Private ownership of the means of production is indefensible." [3]

A legal system that grants and protects property rights provides property owners the liberty to sell their property in accordance to their own valuation of that property; if there are no willing buyers at their offered price they have the freedom to retain it. According to standard capitalist theory, as explained by Adam Smith in Wealth of Nations, when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable commodity. This notion underlies the concept of mutually-beneficial trade where it is held that both sides tend to benefit by an exchange.

Free market

The idealized notion of a "free market" where all economic decisions regarding transfers of money, good, and services take place on a voluntary basis, free of coercive influence, is commonly considered to be an essential characteristic of capitalism. In a free market, rather than these economic decisions being decreed by government they are determined in a decentralized manner by individuals trading, bargaining, cooperating, and competing with each other.

In regard to pricing of goods and services, rather than this being ordained by government they are determined by trades that occur as a result of price agreement between buyers and sellers. The prices buyers are willing to pay for a commodity and the prices at which sellers are willing to part with that commodity are directly influenced by supply and demand (as well as the quantity to be traded). In abstract terms, the price is thus defined as the equilibrium point of the demand and the supply curves, which represent the prices at which buyers would buy (and sellers sell) certain quantities of the good in question. A price above the equilibrium point will lead to oversupply (the buyers which to buy less goods at that price than the sellers are willing to produce), while a price below the equilibrium will lead to the opposite situation. When the price a buyer is willing to pay coincides with the price a seller is willing to offer, a trade occurs and price is determined.

All markets can still be considered as free, though, as long as there is no coercion. However, not everyone believes that a free or even a relatively-free market is a good thing. Some believe that the lack of "perfect information" or "perfect competition" in a free market is grounds for government intervention (see perfect competition). Other situations or activities often perceived as problems with a free market may appear, such monopolies, monopsonies, information inequalities (e.g. insider trading), or price gouging. Wages determined by a free market mechanism are also commonly seen as a problem by those who would claim that some wages are unjustifiably low or unjustifiably high. While most economists call for regulation in in some or all of these areas, staunch advocates of laissez-faire capitalism, such as Milton Friedman, oppose intervening in a market unless coercion occurs. Another critique is that free markets usually fail to deal with the problem of externalities, where an action by an agent positively or negatively affects another agent without any compensation taking place. The most widely known externality is pollution. Here again, many advocate the intervention of the state to establish compensation schemes. However, some, such as libertarians view pollution itself as an act of coercion, as it is an unwilling intrusion upon the body and property of others, and therefore do not consider regulation of it as coercive intervention into the free market but a defensive measure.

Some dismiss the whole idea of "free markets", claiming that they are exploitative or coercive in essence. For example, some say that wages set by a free market rather than by government decree is exploitative since capitalists have appropriated private ownership of resources, thereby putting individuals in a position to accept low wages in order to survive.

Markets have, of course, existed thoughout human history. Hunter-gatherers used to exchange their goods in barter. The appearance of money in Antiquity facilitated exchanges, permitting the flowering of trade fairs in the Middle Ages. Nevertheless, many regulations existed, and the influence of the guilds prevented truly free markets. Likewise, in modern economies, governments do not allow unfettered market operation in many areas.

Economic growth

One of the primary objectives in a social system in which commerce and property have a central role is to promote the growth of capital. The standard measures of growth are Gross Domestic Product or GDP, capacity utilization, and 'standard of living'.

The ability of capitalist economies to sustainably increase and improve their stock of capital was central to the argument which Adam Smith advanced for a free market setting production, price and resource allocation. It has been argued that GDP per capita was essentially flat until the industrial revolution and the emergence of the capitalist economy, and that it has since increased rapidly in capitalist countries [4][5]. It has also been argued that a higher GDP per capita promotes a higher standard of living, including the adequate or improved availability of food, housing, clothing, health care, reduced working hours and freedom from work for children and the elderly. These are reduced or unavailable if the GDP per capita is too low, so that most people are living a marginal existence.

Economic growth is, however, not universally viewed as an unequivocal good. The downside of such growth is referred to by economists as the 'externalization of costs' (see externalization). Among other things, these effects include pollution, the disruption of traditional living patterns and cultures, the spread of pathogens, wars over resources or market access, and the creation of underclasses. In defense of capitalism, philosophers such as Isaiah Berlin have pointed out that all of these ills are neither unique to capitalism, nor are they its inevitable consequences.

Economic mobility

One of the key markers of entrepreneurial economies and 'growth' in a society is its economic mobility, defined as the existence of large changes in the make-up of its socio-economic strata. This is manifested as the occurrence of large fluctuations in the various deciles or quintiles of income and wealth among the population, and the existence of large changes over a person's lifetime in relation to their real earning power. In standard economics, a capitalist system provides more opportunities for an individual to rise faster in the world by entering new professions or establishing a business venture. The instability of economic strata is contrasted with traditional feudal or tribal societies, which are considered to have more stable wealth relationships, and with the egalitarianism that exists in socialist societies, which distribute more of their wealth in the form of social benefits and therefore reduce income mobility, particularly among those who own capital and wish to trade it.

However, the existence of large fluctuations in income deciles does not always represent income mobility - with individuals receiving regular wage increases over their working lives and then retiring, such fluctuations alone do not show that there is 'mobility' per se. Moreover, it is argued by many labor economists that wage instability represents the transfer of risk to workers and particular sectors of the economy such as agriculture, and away from the holders of capital.

Distribution of wealth

Critique against any inequality

Some critics of capitalism argue that there should be no differences in wealth or earnings between humans.

Robert Nozick has argued that no condition of perfect equality could be maintained for very long. If all agents possess the same amount of wealth, they will immediately begin investing it in different ventures which will pay off to varying degrees. Within moments of the first trade, then, inequality would be restored. But voluntary economic exchange is seen as leaving both parties better off as both would not be trading unless the outcome of the trade was an improvement for both. According to this view, even if the resulting distribution is not even, at least it is better than if there were no trading.

See also Criticisms of Socialism.

Critique against excessive inequality in capitalism

Other critics argue that inequality may necessary but that the distribution of wealth and earnings is unfair, dysfunctinal, or immoral in capitalism. In the capitalist economies, the distributions of earnings and, especially, of wealth are very concentrated and skewed to the right. In the US, the shares of earnings and wealth of the households in the top 1 percent of the corresponding distributions are 15 percent and 30 percent, respectively [6].

Some critics note that there are very few people who are twice as tall as average, or who can run twice as fast, or have twice as high an IQ. Some critics argue that the fact capitalism doesn't distribute wealth in a similar fashion means that something is fundamentally wrong with the system. Supporters argue that human contributions vary much more than humans vary in height or IQ. As can be illustrated by comparing the contributions of an arsonist and an inventor/producer of antibiotics. Some people may voluntarily, maybe because they see other things as more valuable, make life choices that make them earn less than their theoretical potential which may increase the variance.

Critics still note that there are many people who have very no wealth. If wealth followed a a bell shaped curve (standard normal distribution), as many other human characteristics and it might be surmised people's ability to be productive, then there should be very few people with no wealth. This could mean that an untamed capitalist system has inherent biases favoring those who already possess greater resources. For example, rich people can give their children a better education and inherited wealth. This can create or even increase large differences in wealth between people who do not differ in ability or effort.

Supporters argue that a problem with using "distribution of wealth" as a standard to measure economic systems is that such a standard can produce seemingly irrational judgments. Under the "distribution of wealth" standard, a system where everyone has nothing is judged as equal to a system where everyone has enormous wealth since the distribution of wealth in the two systems is equal. The claim is made that capitalist economics are not zero-sum games and that more wealth for most people is actually "created" through innovation, and risk-taking. And that inequality may be necessary in this process. For example, the inheritance of wealth may cause people to continue working and saving when they get older. Thus, people who see uneven wealth distribution as a lesser or unavoidable problem tend to argue that if inequality leads to higher average wealth and higher wealth and income for most people, then wealth inequality may be acceptable. For example, there are far fewer poor in China today than under communism, even if there is more inequality [7].

Some advocates of capitalism may partly agree with the critics but think that the problem can be resolved with solutions like progressive taxation, wealth tax, and/or inheritance tax. They note that such taxes are already implemented in most capitalist states. The best extent of such taxes and how much inequality there should be is much discussed and researched, but these variables can be changed without abandoning capitalism.

Other points of view on capitalism's wealth distribution include:

  • Pro-Capitalist:
    • Distribution is not important; the poor live better under capitalism than they would otherwise
    • Collection of wealth in relatively few hands serves a function that in the end benefits all. (see philanthropist)
    • The prospect of becoming wealthier than others serves as an incentive to produce (see motivation).
    • A significant cause of poverty is the lack of capitalism.
    • Capitalism hasn't been properly implemented yet.
    • Wealth distribution concentrated in the hands of the minority of individuals is the natural outcome of capitalism since being more productive than others is a matter of being willing to exert oneself and most people are naturally content to "just get by" with minimal effort.
    • Financial markets and banks where most wealth is stored act as a means of redistribution of wealth (see banking and stock market). Some say that this causes the simple dollar amounts assigned to a persons "net worth" to be completely misleading and inflated.
    • Distribution of wealth does not correlate with economic freedom but prosperity, growth, individual freedom, democracy, and freedom from corruption do, see Economic freedom index
    • Rich people invest a larger proportion of their income than poor people, and according to the standard consensus from Keynes to the neoclassical consensus, this is more beneficiary for the society as whole.
    • The inequality of consumption is far less than the inequality in wealth, since there is no way most of the wealthy could consume all their wealth. To the extent that they consume their wealth, they are redistributing it to others. To the extent that they are not consuming it, they are generally either managing it to create more wealth or giving it away (philanthropy).
    • The economist Thomas Sowell has attributed factors such as geography, climate, culture, and natural resources as primary reasons for inequality. Although this may apply primarily to wealth inequality between nations, not to wealth inequality in a nation.
  • Anti-Capitalist:
    • The capitalists gather their wealth by exploiting the workers (see labor theory of value)
    • Wealth is not beneficial to everyone - not even the wealthy.
    • Perhaps government interference in markets protects the wealthy.
    • Many people have little wealth left over after living expenses, so they can't make it grow quickly.
    • Persistent long-term inequality of wealth undermines the motivation of the poor to improve their stance.
    • Wealthy people save relatively more than poor people. Hence an unequal distribution off wealth undermines an economy's mass buying power, effectively leading to lower aggregate sales and wealth production in the future.
    • Wealth is defined and judged incorrectly, in many different ways.
    • The wealthy may not put their wealth to productive uses, for example, buying land just to deny access to it to others, to keep or return it to a natural state, that they value for some reason

Competition, survival of the fittest and evolving network structure

Capitalist economies typically contain numerous companies, and people are free to enter into many different types of arrangement with each other. Such an economy reacts to technological change, new discoveries and other developments through continual readjustments in the relationships which exist among companies and individuals. In this way the economy's control mechanisms and how information flows through it evolve over time, and are characterised by a kind of "survival of the fittest" selection and evolution process which is not dissimilar to that exhibited in natural systems and their component relationships.

Analysis of the networks of connections and arrangements in the economy has shown a degree of similarity to other networks such as phone systems or the Internet. [8] contains examples of networks of company board members. Networks of customer links and monetary flows exhibit similar characteristics.

Unpredictable/unapproved direction of capitalist economies

While a great deal of planning is undertaken among individual companies and other organisations in capitalist economies, few significant mechanisms for imposing overall direction are available to governments. There is also a scarcity of reliable predictive tools and foreknowledge of how an economy is likely to behave or perform more than a year or two into the future. While most transactions may be planned and agreed by the actors involved, many society-wide phenomena that emerge from the markets and its transactions are often not planned, predicted, approved or authorised by anyone. Nevertheless, in all large-scale modern economies the State conducts a degree of centralized economic planning (using such tools as allowing the country's central bank to set base interest rates), ostensibly as an attempt to improve efficiency, attenuate cyclical volatility, and further particular social goals. Some think that even limited central planning such as the monetary policy of central banks is harmful.

Some economists use chaos theory to argue that it is impossible to make accurate long-term economic predictions. They view the decentralized nature of economic planning and development that occurs in capitalism as one of its greatest strengths, arguing that it permits many solutions to be tried, and that real-world competition generally finds a good solution to emerging challenges. This is opposed to the central planning approach to the running of a society, which often selects inappropriate solutions as a result of faulty forecasting. One possible example is the experience in Somalia where the previously regulated telecommunications industry is reported to be "thriving" now that, and reportedly because, the country lacks a government. [9]


Since individuals typically earn their incomes from working for companies whose requirements are constantly changing, it is quite possible that at any given time not all members of a country's potential work force will be able to find an employer that needs their labor. This would be less problematic in an economy in which such individuals had unlimited access to resources such as land in order to provide for themselves, but when the ownership of the bulk of its productive capacity resides in relatively few hands, most individuals will be dependent on employment for their economic well-being. It is typical for true capitalist economies to have rates of unemployment that fluctuate between 3% and 15%. Some economists have used the term "natural rate of unemployment" to describe this phenomenon.

Depressed or stagnant economies have been known to reach unemployment rates as high as 30%, while events such as military mobilization (a good example is that of World War II) have resulted in just 1-2% unemployment, a level that is often termed "full employment". Typical unemployment rates in Western economies range between 5% and 10%. Some economists consider that a certain level of unemployment is necessary for the proper functioning of capitalist economies. Equally, some politicians have claimed that the "natural rate of unemployment" highlights the inefficiency of a capitalist economy, since not all its resources -- in this case human labor -- are being allocated efficiently.

Some libertarian economists, such as Henry Hazlitt, argue that higher unemployment rates are in part the result of minimum wage laws, as well as in part the result of misguided monetary policy, and are not inevitable in a capitalist economy. In "Economics in One Lesson", Hazlitt argues that if the value of the work of some potential employees is lower than the minimum wage, it would penalise the employer to employ them. Accordingly, if the value of the productive capacity of a given employee is worth less to the employer than the minimum wage, that person will become unemployed, and therefore unemployment will exist whenever the legal minimum wage exceeds the true economic value of the least productive members of the labor pool . Likewise, if the amount of money a person can obtain on welfare approaches or equals what they could make by working, that person's incentive to work will be reduced.

Some unemployment is voluntary, such as when a potential job is turned down because the unemployed person is seeking a better job, is voluntarily living on savings, or has a non-wage-earning role, such as in the case of a traditional homemaker. Some measures of employment disregard these categories of unemployment, counting only people who are actively seeking work and have been unable to find any.

Role of government and market failures

Citing the ideal of a free market, many consider an economy with lower taxes, smaller government and fewer regulations to be more capitalistic. Anarcho-capitalists and libertarians claim that capitalism requires no government or taxes. Others doubt that property rights could exist in such a system and consider minarchism (minimal statism) to be the most capitalistic political system.

The last century saw a very large increase in the role of governemnt in Western countries. Combined U.S. government spending increased from 3-4% of GDP to 33%. An average for 16 industrial nations jumped from 8% of GDP to 45%.[10] Thus it can be argued that the degree of capitalism has seen a remarkable decline in Western nations.

Related to this is the question of market failures. A market failure is a case in which a market fails to efficiently provide or allocate goods and services. Examples could be pollution, health care, unemployment or wealth inequality. Libertarians argue that there are no market failures. Socialists argue that the markets always fail. Between these extremes there are a wide spectrum of political ideologies with different views on market failures and how to prevent them.

Many eminent economists have analysed market failures, and see the state's role as a mitigator of these failures. Monopolies, for instance, appear when the number of producers is reduced to one. This single firm will then use its status to drive prices higher than the market price. Since the consumers have no alternative, they will have to accept these higher prices. In cartels, or oligopolies, several firms control the market and can push for higher prices. The state can prevent monopolies, cartels and oligopolies by promoting antitrust laws. Similarly, pollution, health care and education are areas which are difficult to solve simply by the market.

Libertarians would instead argue that too many regulations restrict competition, that the taxes go to the special interest groups with the most political clout and that the almost constantly expanding governments do things less efficiently than the private sector. Their arguments to overcome the problems cited above have, however, only convinced a minority.

Also, governments overseeing economies typically labeled as capitalist have been known to set mandatory price floors or price ceilings at times, thereby interfering with the free market mechanism. This usually occured either in times of crises, or was related to goods and services which were viewed as strategically important. Electricity, for example, is a good that was or is subject to price ceilings in many countries.

Other approaches

Capitalism in political ideologies

Main article: Capitalism and related political ideologies

Marxist critique 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"). Opponents of capitalism counter this by pointing out the unchanged after-tax income of the poorest quintile of the U.S. population during the last two decades. While at the same time the average income and especially the income of the rich have increased. [11]. According to "United for a Fair Economy," in 1982 CEOs of major corporations in the U.S. earned 42 times the annual wages of the average worker; in 2002 the ratio stood at 282:1 [12]. Supporters of capitalism point out that the percentage of people in developing countries living below $1 per day have halved in only twenty years, especially in countries like China that have embraced capitalism [13]. Life expectancy has almost doubled in the developing world since WWII and the gap to the developed world is starting to close [14]. Looking at the world as a whole and not only the U.S. shows that income inequality is in fact diminishing [15].

Marxists believe that capitalism allows capitalists - the owners of capital - to exploit workers. The existence of private property is seen as a restriction on freedom, whereas supporters of capitalism believe in the freedom to become wealthy which requires establishing private property. 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. 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 political systems, they are independent from each other. Capitalist systems have often functioned under unelected governments, some examples being Hong Kong, Singapore, and Chile under the rule of General Pinochet.

In mainland 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 bourgeoisie. 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 employing wage labor, increasing unemployment to motivate those who are still working, transforming state owned enterprises into joint stock companies, and encouraging the growth of the joint venture and private capitalist sectors.

Which Economies are "Capitalist" ?

In mainstream economics, a capitalist economy is one where the overwhelming majority of decisions regarding pricing, production, and distribution of goods and services are made through market interactions by the private sector in a free market with private ownership of the means of production procured by the investment of capital. However, exactly where to draw the line in labeling economies is a matter of some debate.

Some believe that it is inaccurate to call any of the major industrialized economies "capitalist" because of the level of government intervention in the economy. For example, some assert that the market in the United States of America is significantly less than "free", and that therefore it is more appropriately termed a mixed economy that is merely skewed more toward capitalism than most national economies, rather than being a true representation of capitalism. Still others might say that the U.S. economy is capitalist, but the U.K. economy is a "mixed economy," and so on, depending upon their perception of how much economic freedom exists in those locales.

Many Greens, Marxists and anti-Globalists agree that the governments of the major industrial economies are not serving in the role of protecting "the free market", but would go on to say that these governments are, in fact, acting to protect the owners of capital and corporations as their first priority, sometimes expressed as "socialism for the rich, capitalism (cut throat competition) for the poor." These critics, therefore, would assert that the correct term for the core industrial nations is neither capitalism, nor mixed economy, but corporatist. For example, noteable leftist Noam Chomsky says that "There's nothing remotely like capitalism in existence. To the extent there ever was, it had disappeared by the 1920s or '30s." (interview with Detroit Metro Times). Libertarians and other free-market advocates may also share this opinion regarding some or all of the major economies.

Nevertheless, mainstream economists, for their part, admit that the present economic systems have diverged from earlier forms labeled "capitalism", and many believe that some of the modern economies are still best described as being "capitalism" rather than "mixed economy" or "corporatist."

Another classification, associated largely with the Austrian school of economics, regards most present economic systems as a perversion of capitalism, sometimes called crony capitalism, and envisages a de-cronied capitalist ideal.

Some use the phrase "laissez-faire capitalism" to distinguish between "ordinary capitalism," believing that there is a difference. Some also use the phrase to differentiate their preferred economic system from present economic systems which they believe are wrongly labeled as capitalism by many. These also say that the phrase "laissez-faire capitalism" is redundant, pointing out that the common definition of capitalism explicitly refers to trade occurring in a "free market." These assert that "capitalism" is already a laissez-faire system by definition.

Proponents of the world-system perspective suggest that the whole globe has been incorporated into a single capitalist world-economy. Even though a state may be socialist, it works in relation to a much larger, overarching capitalist world-economy.

Human rights violations, imperialism, and democracy

Large scale human rights violations and imperialism have occurred in and by states characterized as capitalist or in their colonies conquered by military force. They include lack of democracy and systematic violence against political opponents (like in Chile under the regime of Pinochet or today in China), exploitative wars (like the Opium wars or the Sino-Japanese War), and large scale democide (like in the Congo Free State). Many of these violations occurred during a time period and in states sometimes considered being more capitalist than today since the government share of the economy was much smaller.

Proponents of capitalism point out that these problems have been widespread through all of human history, including in states characterized as socialist such as in Cambodia under Pol Pot. Some assert that these practices are not consistent with principles of capitalism even though they have existed in nations or in the colonies of nations commonly, or loosely, labeled as capitalist. They deny that many of the colonies had capitalist economic system and claim that their economies mostly continued to be feudalistic. Instead they emphasize that it was capitalist states that abolished slavery throughout the world and that it was capitalist states who developed the modern democratic system. The strong economic growth during capitalism may encourage democratization, or vice versa. There is debate about whether liberal democracy, in the sense of electoral rights and civil liberties, is a consequence of economic growth [16], a cause of it [17], or completely unrelated to it [18]. These studies tend to indicate that establishing the rule of law in protecting private property and free markets, rather than mere democratization, is what is most instrumental in generating economic growth.

One of the very few studies simultaneously examining the relationship among economic freedom (see below), economic development (measured with GDP/capita), and political freedom (measured with the Freedom House index) found that high economic freedom increases GDP/capita and a high GDP/capita increases economic freedom. A high GDP/capita also increases political freedom but political freedom did not increase GDP/capita. There was no direct relationship either way between economic freedom and political freedom if keeping GDP/capita constant.

Indices of Economic Freedom

There are two Indices of Economic Freedom used in economic research, one published by the Heritage Foundation(a neoliberal thinktank) and the Wall Street Journal, another published by the Fraser Institute. Both attempt to measure of the degree of capitalism in countries. They use statistics from independent organizations like the United Nations to score countries in various categories like the size of government, degree of taxes, security of property rights, degree of free trade and size of market regulations. Many peer-reviewed papers have been published using this material on the relationship between capitalism and for example poverty [19]. The more advanced capitalist countries have much higher average income per person, higher income of the poorest 10%, higher life-expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption. The share of income in percent going to the poorest 10% is the same for both more and less capitalistic countries. [20]. Other studies have shown similar results [21].

Attempts to decide the importance of the subcomponents of the indices have often yielded contradictory results. However, strong property rights may be particularly important. The economist Hernando de Soto has argued that weak property rights, especially for the poor, play a major role in poverty and underdevelopment in developing countries [22] [23]. Many developing countries are now trying to strengthen and simplify their property rights system after the successful application of his ideas in Peru [24].


See also

External links


  • Braudel, Fernand. Civilization and Capitalism : 15th - 18th Century 3 vols.
  • Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass., and London: Belknap Press of Harvard University Press, 1977.
  • Galbraith, John Kenneth. The New Industrial State, 4th ed., 1985.
  • Harvey, David. "The Political-Economic Transformation of Late Twentieth Century Capitalism." In Harvey, David. The Condition of Postmodernity. Cambridge, MA: Blackwell Publishers, 1990. ISBN 0631162941
  • Heilbroner, Robert L. The Nature and Logic of Capitalism, 1985.
  • Landes, David S. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, U.K.: Cambridge University Press, 1969.
  • Marx, Karl. Capital: A Critical Analysis of Capitalist Production, 3 vol., 1886–1909; first published in German as Das Kapital: Kritik der politischen Oekonomie, 1867–1894.
  • Rostow, W. W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press, 1960.
  • Rand, Ayn. Capitalism: The Unknown Ideal ISBN 0451147952
  • Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.

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