Capitalism

• 1. Introduction

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  Capitalism is a word that began as an insult. The term in its modern sense is first attributed to Louis Blanc in 1850, who defined it as the appropriation of capital by some to the exclusion of others. The economist and historian Robert Hessen called the word itself a term of disparagement and a misnomer for economic individualism. So the name most often attached to the world's dominant economic system was coined largely by people who wanted to tear it down. This is a system defined by private ownership of the means of production and the pursuit of profit, yet there is no universally agreed upon definition of it. Some doubt the word possesses valid scientific dignity. The economist Daron Acemoglu has suggested it should be abandoned entirely. How did a contested label, born from socialist critique, come to describe most of the economies on earth? Where did the system itself begin, and why do thinkers still argue over whether it strengthens democracy or undermines it?

• 2. A Disputed Name

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  The word "capitalist" arrived before the word "capitalism," dating to the mid-17th century to mean an owner of capital. It traces back through the late Latin capitale to caput, meaning "head," the same root that gave us "chattel" and "cattle" in the sense of movable property. By 1283 capitale described the capital assets of a trading firm. The Dutch publication Hollantse Mercurius used "capitalists" in 1653 and 1654 for owners of capital. In French, Étienne Clavier wrote of capitalistes in 1788, four years before Arthur Young's first recorded English usage in Travels in France in 1792. David Ricardo referred to the capitalist many times in his Principles of Political Economy and Taxation of 1817. Samuel Taylor Coleridge used the term in Table Talk in 1823, and Pierre-Joseph Proudhon applied it in What is Property? in 1840. According to the Oxford English Dictionary, "capitalism" first appears in English in 1854, in William Makepeace Thackeray's novel The Newcomes, where it meant having ownership of capital. Karl Marx, often credited with the modern sense, actually used "capitalist mode of production" far more than the word "capitalism" in Das Kapital of 1867. His collaborator Friedrich Engels did much to popularize the term. By the 20th century, supporters fled its negative connotations, swapping in phrases like "free enterprise" and replacing "capitalist" with "investor" or "entrepreneur."

• 3. From Manor To Factory

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  In 16th-century England the manorial system broke down, and land concentrated in the hands of fewer landlords with increasingly large estates. The old serf-based labor gave way to workers employed within an expanding money-based economy. Terms of rent became subject to market forces rather than the stagnant custom and feudal obligation of before. This pressure pushed both landlords and tenants to raise agricultural productivity in pursuit of profit. The economic doctrine that prevailed from the 16th to the 18th centuries is called mercantilism, a system of trade for profit during the Age of Discovery. England pursued it on a large scale during the Elizabethan Era of 1558 to 1603. Thomas Mun set out a systematic account of the balance of trade in England's Treasure by Forraign Trade, written in the 1620s and published in 1664. Francis Bacon described mercantilism's purpose as the opening and well-balancing of trade and the banishing of idleness. Karl Polanyi disputed this entire chronology. He argued the hallmark of capitalism is generalized markets for what he called "fictitious commodities," namely land, labor, and money. Not until 1834, he insisted, was a competitive labor market established in England, so industrial capitalism could not have existed before that date.

• 4. The Reach Of Empire

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  The British East India Company and the Dutch East India Company, drawing massive contributions from Mughal Bengal, opened an expansive era of commerce backed by colonial and expansionary powers granted by nation-states. In the mid-18th century David Hume, who lived from 1711 to 1776, and Adam Smith, who lived from 1723 to 1790, challenged the mercantilist belief that the world's wealth stayed constant and that one state could only grow richer at another's expense. Britain then abandoned the protectionism mercantilism had prescribed. Richard Cobden and John Bright, drawing on the Manchester School, launched a movement to lower tariffs in the 19th century. Britain repealed the Corn Laws in 1846 and the Navigation Acts in 1849, in line with David Ricardo's advocacy of free trade. Colonization yielded valuable natural resources. After the Opium Wars of 1839 to 1860 and the British conquest of India by 1858, vast populations of Asia became consumers of European exports. The economist John Maynard Keynes captured the era's wonder, describing how the inhabitant of London could order by telephone, while sipping his morning tea, the various products of the whole earth and expect their early delivery. From the 1870s to the early 1920s the global financial system was tied mainly to the gold standard, which the United Kingdom first formally adopted in 1821.

• 5. Markets And Their Mechanics

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  Competition arises when more than one producer tries to sell similar products to the same buyers, and its adherents believe it leads to innovation and more affordable prices. Adam Smith described this rivalry in The Wealth of Nations in 1776 as a force that allocates resources to their most valued uses. He believed a prosperous society is one where everyone is free to enter and leave the market and change trades as often as he pleases. A monopoly occurs when a firm holds exclusivity over a market, free to limit output and raise prices without fear of rivals. In 1890 the Sherman Antitrust Act became the first United States legislation to limit monopolies. Supply and demand offers the model of how prices are determined. David Besanko and Ronald Braeutigam set out its basic laws: when demand rises and supply holds, a shortage drives prices up, and when supply rises and demand holds, a surplus drives prices down. The roots run deep. The fourteenth-century Mamluk scholar Ibn Taymiyyah wrote that if desire for goods increases while availability decreases, the price rises. John Locke offered a clear description in his 1691 work on interest and the value of money. Fleeming Jenkin published the first drawing of supply and demand curves in his 1870 essay, and Alfred Marshall popularized the model in his 1890 Principles of Economics.

• 6. Many Capitalisms

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  Most existing economies today are mixed economies, blending free markets with state intervention and, in some cases, economic planning. The Harvard Kennedy School economist Dani Rodrik divides the system into three historical variants. Capitalism 1.0 of the 19th century left markets largely unregulated, with the state minding little beyond defense and property rights. Capitalism 2.0 of the postwar years brought Keynesianism, heavy regulation, and strong welfare states. Capitalism 2.1 mixed unregulated markets with globalization and national obligations. Beyond these run many named forms. Rudolf Hilferding brought finance capitalism into prominence through his 1910 study Finance Capital, examining German trusts, banks, and monopolies. Vladimir Lenin folded that work into Imperialism, the Highest Stage of Capitalism in 1917, concluding that banks operated as the chief nerve centres of the whole capitalist system. Fernand Braudel traced earlier bursts of finance capitalism to the Genoese in the 16th century and the Dutch in the 17th and 18th. State capitalism describes a market economy dominated by state-owned, profit-seeking enterprises, a label Aldo Musacchio of Harvard Business School ties to governments exercising widespread influence. Max Weber coined "political capitalism" in his 1921 book Economy and Society to describe profit-making through non-market means. Welfare capitalism, associated with the Nordic model and Rhine capitalism, folds social welfare policies into the system.

• 7. Freedom Or Inequality

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  Friedrich Hayek, who lived from 1899 to 1992, argued in The Road to Serfdom in 1944 that the economic freedom present in capitalism is a requisite of political freedom. He held that the market mechanism is the only way to decide what to produce and how to distribute it without coercion. Milton Friedman pressed the same case, claiming centralized economic operations are always accompanied by political repression. Robert Dahl argued in On Democracy that capitalism benefits democracy because growth and a large middle class are good for it. Thomas Piketty of the Paris School of Economics offered the counterweight in Capital in the Twenty-First Century in 2013, asserting that inequality is the inevitable consequence of growth and that concentrated wealth can destabilize democratic societies. Clara Mattei went further, calling capitalism and democracy fundamentally incompatible, since real democracy requires economic agency that capitalism undermines by making people dependent on selling their labor. The historical record refuses to settle the dispute. Singapore runs a successful open market economy under largely one-party rule. The private sector of the People's Republic of China has thrived under an authoritarian government. Augusto Pinochet's rule in Chile produced economic growth alongside high inequality, using authoritarian means to make a safe environment for investment. Suharto's reign in Indonesia and his extirpation of the Communist Party there allowed capitalism to expand. The question of whether growth must always lead toward democracy remains open, with authoritarian regimes managing growth through capitalism's competitive principles while withholding political freedom.