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Capitalism as an economic system There is much debate of how to define capitalism. Some proponents of capitalism (like Milton Friedman) tend to emphasise the role of efficient free markets, which, they claim, 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. As Marx observed (see also 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.

According to Karl Marx, the treatment of labor as a commodity led to people valuing things more according to their price rather than their usefulness (see commodity fetishism[?]) and to 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 in capitalism. 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 (see Companies for listing of such entities). The owners can pay themselves some of the income derived from the business (Dividends), sell shares in the company, or they can sell all of the equipment, land, and other assets, and split the proceeds between them.

All real, traditionally capitalist economies have had coporations working along the lines of the above example existing in parallel with other types of organisation such as governments, sole traders, partnerships and sometimes cooperatives, credit unions, and other entities. It has not always been agreed 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 there is much room for debate. However, many people agree that it was at the time when share trading in corporate bodies 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.

Shares can be seen as converting company ownership into a commodity - the ownership rights are divided into units (the shares) which can be easily traded. In a similar way, bonds can be seen 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. Inreases in communications technologies have helped facilitate an increase in the number and availability of financial instruments, and the ease of trading.

Under 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 will be employed,
  • what activities employees will do,
  • which machines and tools will be used for production.
In larger companies, authority is usually delegated in a hierarchical system of management. When company ownership is spread among many shareholders, the shareholders generally have votes in the excercise of authority over the company 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

Economic Growth: capitalist economies have shown an erratic but sustained tendency towards economic growth defined as an increase in GDP. 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. Others have argued that the natural tendency of capitalism is to continuous growth and that government intervention is the cause of depressions. Yet others argue that growth, or often growth insufficiently guided by democracy, is a bad thing. Still others argue that modern capitalism has been a disaster because of its other effects besides the growth of GDP. Further discussion on these points might be found in following sections. 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 whatever they choose. Various studies have shown distributions with the peak in the distribution at or near zero with fewer people owning progressively higher wealth. Common mathematical models of such distributions include power-law distributions, exponential distributions, and mixtures of the two. In these distributions some people own hundreds of thousands, or sometimes millions of times more than average. 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 tall as average, in fact there are none even 2 times as tall as average. If height were distributed in the same way as wealth with the same average height as now, most people would be under 1 meter (3 feet) tall, but you would still see people 100 kilometers (60 miles) tall, if you could see up that far, and the wealthiest would rise well into space. This seems to strike many people as being unfair and/or dysfunctional.

It is not agreed as to why capitalist economies do not distribute wealth in a bell-shaped fashion or why they tend to collect it in such an unequal fashion. Some argue that collection of wealth in relatively few hands serves a function that in the end benefits all, while others say that it is not beneficial to anyone. Yet others argue that the cause is not enough capitalism, or that capitalism hasn't been properly implemented yet - perhaps ordinary people do not have practical access to all of the legal and financial optimisation and tax minimisation techniques of the wealthy because the tools to do so have not yet been commoditized sufficiently, or perhaps government interferrence in markets protects the wealthy. Others argue that capitalist economies allocate wealth to the rich because they deserve it, or because society requires that they have it as an incentive, or for any number of reasons. Still others believe that the present wealth distribution is the only possible outcome of capitalism, while critics often claim that the uneven distribution shows capitalism to be faulty, or immoral. Further discussion on these points might be found in following sections. While it may be debated as to whether capitalism causes the uneven distribution of wealth in capitalist economies, or whether it is good or bad, it is clear that capitalist economies do have uneven wealth distributions.

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, by means of companies and individuals re-assessing their arrangements with each other. Therefore, the control mechanisms of the economy, and the way that information flows through it, evolve over time, and are subject to a kind of "survival of the fittest" form of selection not unlike biological entities. Analysis of the networks of connections and arrangements in the economy has shown a degree of similarity to other networks such as the phone system or the Internet. [1] (http://www.theyrule.net/) has examples of networks of company directors. Networks of customer links, and monetary flows exhibit similar structures.

Some see the evolution of capitalist economies as a positive adaptation and tendency towards improvement. Others see it as pointless random and chaotic fluctuations.

Unknown/Unapproved Direction of Capitalist Economies: while there is a great deal of planning within companies and other organisations in capitalist economies, there is no economy-wide direction, or even any reliable prediction or knowledge of how the economy will behave or perform more than a year into the future. While nearly all transactions may be approved of and planned by the people taking part, many society-wide phenomena emerging from the transactions or markets are often not planned, predicted, or approved or authorised by anyone.

Unemployment/Employment: Since individuals typically earn income through finding a company for which to work, it is possible that not all individuals will be able to find a company that will want their labor at a given time. This would not be such a big problem in an economy in which individuals had access to the resources to provide for themselves, but when ownership of the bulk of productive resources is collected in relatively few hands, many individuals are made dependent on employment for their well being. It is normal that all real capitalist economies have fluctuating unemployment rates typically between 3 and 15%. Occasionally they have reached levels of 30%, and occasionally they have fallen to 2 or 1%, but rarely is there enough employment for all. Some economists consider a certain level of unemployment to be necessary for capitalist economies to function. 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, capitalist systems have functioned well under unelected governments, two examples being Hong Kong and Singapore.

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 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.

Capitalism and Imperialism

J.A. Hobson, a British liberal writing at the time of the fierce debate on imperialism during the Boer War, observed the spectacle of the ?Scramble for Africa? (see colonialism in Africa[?]) and emphasized changes in European social structures and attitudes as well as capital flow, though his emphasis on the latter seems to have been the most influential and provocative. His so-called accumulation theory suggested that that capitalism suffered from under-consumption due the rise of monopoly capitalism and the resultant concentration of wealth in fewer hands, which apparently gave rise to a misdistribution of purchasing power. Logically, this argument is sound, given the huge impoverished industrial working class then often far too poor to consume the goods produced by an industrialized economy. His analysis of capital flight and the rise of mammoth cartels later influenced Lenin in his Imperialism: The Highest Stage of Capitalism, which has become a basis for the modern neo-Marxist analysis of imperialism.

Contemporary World-Systems theorist Immanuel Wallerstein[?] perhaps better addresses Hobson's counterarguments without degrading Hobson's underlying inferences. Wallerstein's conception of imperialism as a part of a general, gradual extension of capital investment from the center of the industrial countries to an overseas periphery thus coincides with Hobson?s. According to Wallerstein, Mercantilism became the major tool of semi-peripheral, newly industrialized countries such as Germany, France, Italy, and Belgium. Wallerstein hence perceives formal empire as performing a function ?analogous to that of the mercantilist drives of the late seventeenth and eighteenth centuries in England and France.? The expansion of the Industrial Revolution hence contributed to the emergence of an era of aggressive national rivalry, leading to the late nineteenth century scramble for Africa and formal empire.

Capitalism as an ideology As with many common words, and most particularly ideologically laden words, "capitalism" has many meanings. There can be great confusion amongst these meanings, and readers must be careful of which meaning a writer intends in any particular usage.

"Capitalism" as a phenomenon (the system of the private ownership of capital goods) is certainly different from "capitalism" as an ideology (the philosophical advocacy of that system). Moreover, the precise ideology meant by "capitalism" in the latter sense differs: what a Marxist or Green may describe as capitalist ideology may seem thoroughly alien to what a classical liberal means by calling himself a capitalist, and vice versa.

Opponents of capitalism sometimes deny that these represent subtantially different things, or say they go hand-in-hand. This criticism is often founded upon the Marxist idea that ideology is largely a consequence of underlying economic realities -- or the simplification thereof which holds that people favor ideologies which justify their behavior or privilege.

Although it is arguable whether these meanings 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

Some political ideologies favor capitalism:
  • Libertarianism, sometimes also called classical liberalism, defends a capitalist free market with minimal state intervention. Minarchist libertarians see the role for government in the economy as solely defending the rights of the participants against violence, theft, fraud, and damages such as pollution. Anarcho-capitalists see no role for government whatsoever.
  • Conservatism varies depending on countries in its specific stances. In Western nations, conservatives often defend the status quo of capitalist practices. See also political conservatism.
  • Mercantilism defends a mostly free market within the nation, but proposes state intervention to protect domestic commerce and industries against foreign competition. See also protectionism, and in opposition, free trade.

Some ideologies favor a mixed economy with capitalist and state-run elements:

  • Social democracy and new liberalism argue for extensive state regulation and partial intervention in an otherwise capitalist economy. Social democrats occupy a position between socialists and classical liberals with regards to economic matters. They see a need for government to regulate employment, trade, and labor, and sometimes favor nationalization of certain industries. See also welfare state, political liberalism.
  • Distributism desires a economy with private property and with almost all people possessing a means of production. This would take place in for example a country of sustenance farmers. In a distributist economy, laws would be made to restrict larger corperations from taking over. Distributists favor achieving these goals not primarily through government regulation, but firstly through grass roots efforts and collaberation.
  • Fascism established a state-controlled economy with powers delegated to capitalist interests subservient to the central government. Socialists sometimes describe modern capitalism as "fascist", meaning an analogy to historical fascism with its cooperation (or cronyism) between industry and government.

Some ideologies oppose capitalism and support a collectively run economy:

  • Socialism argues for greater state control of the economy than under social democracy. Areas of capitalism or private ownership[?] may remain in certain sectors (such as small businesses[?]) under socialism, but industry and labor are regulated by the state for the benefit of the populace at large.
  • Communism is a variant of socialism which calls for the overthrow of the capitalist system and the establishment of public ownership of the means of production. Communists see socialism as a stage towards the establishment of a stateless and classless economy. Historical Soviet Communism, a system of Party-controlled socialism, is distinct from the Communist ideal.
  • Libertarian socialism or left anarchism argues for collective control of the 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 Communist Party of China 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".

See also

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