Part of the series on Capitalism

Movements Liberalism Libertarianism Neoconservatism Neoliberalism Social liberalism Objectivism Ordoliberalism Social democracy Variants Anarcho-capitalism Consumer capitalism Corporate capitalism Creative capitalism Crony capitalism Democratic capitalism Eco-capitalism Finance capitalism Global capitalism Humanistic capitalism Inclusive capitalism Late capitalism Laissez-faire capitalism Liberal capitalism Merchant capitalism Mixed economy Technocapitalism Regulatory capitalism Rentier capitalism Social capitalism Social market economy State capitalism State monopoly capitalism Welfare capitalism Schools of thought Austrian school Chicago school Classical economics Keynesian economics New Keynesian economics Monetarism Neoclassical economics Objectivism Supply-side economics Origins Age of Enlightenment Feudalism Industrial Revolution Physiocrats Mercantilism People Adam Smith Milton Friedman John Maynard Keynes Friedrich Hayek Alfred Marshall John Stuart Mill David Ricardo Theories Capitalist mode of production Comparative advantage Free price system Invisible hand Market Spontaneous order Supply and demand Ideas Central bank Commercial law Companies law Competition law Consumer protection Copyright Corporations Deregulation Economic freedom Economic liberalism Financial regulation Fiscal policy Free trade agreements Freedom of contract Globalization Harmonisation of law Intergovernmentalism Labour law Limited government Monetary policy Intellectual property Patents Private property Privatization Regulated market Supranationalism Wage labour Welfare state Topics Anti-capitalism Criticism Culture of capitalism History History of theory Periodizations of capitalism Related topics Advanced capitalism Consumerism Corporate nationalism Corporatism Market fundamentalism Post-capitalism Trickle-down economics Philosophy Portal Politics Portal  v • d • e

Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned and controlled rather than publicly or state-owned and controlled.^[1] In capitalism, the land, labor, capital and all other resources, are owned, operated and traded by private individuals or corporations for the purpose of profit,^[2][3] and where investments, distribution, income, production, pricing and supply of goods, commodities and services are primarily determined by private decision in a market economy largely free of government intervention.^[4][5] A distinguishing feature of capitalism is that each person owns his or her own labor and therefore is allowed to sell the use of it to employers.^[2][6] In capitalism, private rights and property relations are protected by the rule of law of a limited regulatory framework.^[7][8] In the modern capitalist state, legislative action is confined to defining and enforcing the basic rules of the market,^[7][8] though the state may provide some public goods and infrastructure.^[9] Laissez-faire capitalism, which some consider to be 'pure capitalism'^[10] is said to have never existed in practice.^[11][12][10]

A laissez-faire conception of capitalism known as anarcho-capitalism, which draws largely on Austrian economics, seeks to eliminate the state and replace it entirely by market processes and private enterprise.

The central axiom of Capitalism is that the best allocation of resources is achieved through consumers having free choice, and producers responding accordingly to meet collective consumer demand. This contrasts with planned economies in which the state directs what shall be produced. A consequence is the belief that privatization of previously state-provided services will tend to achieve a more efficient delivery thereof. Further implications are usually in favor of free trade, and abolishment of subsidies. Although individuals and groups must act rationally in any society, the consequences of both rational and irrational actions are said to be more readily apparent in a capitalist society.

Because all large economies today have a mixture of private and public ownership and control, some feel that the term 'mixed economies' more precisely describes most contemporary economies.^[13][14] In the 'capitalist mixed economy', the state intervenes in market activity and provides many services.^[15] During the last century capitalism has often been contrasted with centrally planned economies.

Capitalistic economic practices have incrementally become institutionalized in England between the 16th and 19th centuries, although some features of capitalist organization existed in the ancient world, and early aspects of merchant capitalism^[16] flourished during the Late Middle Ages.^[17] Capitalism has been dominant in the Western world since the end of feudalism.^[17] From Britain, it gradually spread throughout Europe, across political and cultural frontiers. In the 19th and 20th centuries, capitalism provided the main, but not exclusive, means of industrialization throughout much of the world.^[18]

Contents 1 Perspectives 1.1 Classical political economy 1.2 Marxian political economy 1.3 Weberian political sociology 1.4 German Historical School and Austrian School 1.5 Keynesian economics 1.6 Neoclassical economics and the Chicago School 2 History 2.1 Elements of Capitalism 2.2 The Crisis of the 14th Century and the 'Pre-History of Capitalism' 2.3 Mercantilism 2.4 Commercialism 2.5 Industrialism 2.6 Monopolism 2.7 After the Great Depression 2.8 Globalization 3 Political advocacy 3.1 Support 3.2 Criticism 3.3 Democracy, the state, and legal frameworks 4 See also 5 Notes 6 References 7 Further reading 8 External links

Perspectives

According to the Oxford English Dictionary, capitalism was first used by novelist William Makepeace 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 capitalist to the capitalist mode of production (kapitalistische Produktionsform) and in Das Kapital to 'Kapitalist', 'capitalist' (meaning a private owner of capital).[19] However, the first use of capitalism to describe the production system was the German economist Werner Sombart, in his 1902 book The Jews and Modern Capitalism (Die Juden und das Wirtschaftsleben). Sombart's close friend and colleague, Max Weber, also used capitalism in his 1904 book The Protestant Ethic and the Spirit of Capitalism (Die protestantische Ethik und der Geist des Kapitalismus). Other terms sometimes used for capitalism, include: economic liberalism[20] laissez-faire[21] laissez-faire capitalism[21] market capitalism[17] market liberalism private enterprise[17]

Karl Marx first used the phrase capitalist mode of production as a critique to the Industrial economy, in which large disparities of wealth existed between the capitalists and the wage laborers. Marx's work defined a capitalistic economy as a system of primarily private ownership of the means of production in a mainly market economy, with a legal framework on commerce and a physical infrastructure provided by the state.^[22] According to Marxist analysis, a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent, and must instead be compelled, in order to survive, to sell their labor for a living wage.^[23][24][25] The concept of capitalism has since evolved over time, with later thinkers often building on the analysis of earlier thinkers. Moreover, the component concepts used in defining capitalism — such as private ownership, markets and investment — have evolved along with changes in theory, in law, and in practice.

However, various scholars suggested that Marx failed to make a distinction between capitalism and mercantilism.^[26] They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist doctrines of mercantilism with capitalism.

Classical political economy

Main articles: Classical economics and Classical liberalism

The classical school economic thought emerged in Britain in the late 18th century. The classical political economists Adam Smith, David Ricardo, Jean-Baptiste Say, and John Stuart Mill published analyses of the production, distribution and exchange of goods in a market that have since formed the basis of study for most contemporary economists.

Contributions to this tradition are also found in the earlier work of David Hume, and the physiocrats in mid-18th century France who promoted free trade and their conception that wealth originated from land. Physiocrats like François Quesnay, who published Tableau Économique (1759), first analytically described the economy, laid the foundation of the Physiocrats economic theory, and Anne Robert Jacques Turgot who opposed the tariff and customs duties, advocated free trade. Richard Cantillon defined long-run equilibrium as the balance of flows of income, argued how land influence prices, and described the supply and demand mechanism influence short-term prices.

Adam Smith's attack on mercantilism and his reasoning for 'the system of natural liberty' in The Wealth of Nations (1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today, particularly his theory of the 'invisible hand' of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period.^[27] He criticized monopolies, tariffs, duties, and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo, second most important of the classical political economists and one of the most influential economists of modern times.^[28] In The Principles of Political Economy and Taxation (1817) he developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade. Ricardo was a supporter of Say's Law and held the view that full employment is the normal equilibrium for a competitive economy.^[29] He also argued that inflation is closely related to changes in quantity of money and credit and was a proponent of the law of diminishing returns, which states that each additional unit of input yields less and less additional output.^[30]

The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods.^[9]. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.^[31]

While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public goods.^[32] For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll). In addition, he advocated retaliatory tariffs to bring about free trade, and copyrights and patents to encourage innovation.^[32]

Marxian political economy

Main article: Marxian economics

Karl Marx considered capitalism to be a historically specific mode of production (the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production) in which capitalism has become the dominant mode of production.^[33] The capitalist stage of development or 'bourgeois society,' for Marx, represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist or communist transformation of human society as the end of the series of first aristocratic, then capitalist, and finally working class rule was reached^[34][35].

Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market. Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist. This difference in values, he argues, constitutes surplus value, which the capitalists extract and accumulate. In his book Capital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers — all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities.^[36] In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy.^[37]

For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. However, this argument is intertwined with Marx's version of the labor theory of value asserting that labor is the source of all value, and thus of profit. This theory is contested by most current economists, including some contemporary Marxian economists.^[18] One line of subsequent Marxian thinking sees the centrally planned economic systems of existing 'communist' societies that were still based on exploitation of labor as 'state capitalism.'^[38]

Vladimir Lenin, in Imperialism, the Highest Stage of Capitalism (1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism - which he also called 'imperialism' - in order to find new markets and resources, representing the last and highest stage of capitalism.^[39]

Some 20th century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive.^[40] Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity, as when an absolute majority of the population is engaged in non-capitalist economic activity.^[41]

Weberian political sociology

In some social sciences, the understanding of the defining characteristics of capitalism has been strongly influenced by 19th century German social theorist Max Weber. Weber considered market exchange, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor.^[42]

In his book The Protestant Ethic and the Spirit of Capitalism (1904-1905), Weber sought to trace how capitalism transformed these traditional modes of economic activity. For Weber, the 'spirit of capitalism' began with the Puritan understanding of one’s ‘calling’ in life and their laboring for God rather than for men. This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, 'Whatever you do, do your work heartily, as for the Lord rather than for men.' In the Protestant Ethic Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…” Thus in Weber's opinion, it was with a devotion to God in the workplace and seeking assurance of salvation described as the Protestant work ethic that the Puritans helped form the basis to the modern economic order.

This 'spirit' was gradually codified by law; rendering wage-laborers legally 'free' to sell work; encouraging the development of technology aimed at the organization of production on the basis of rational principles; and clarifying the apparent separation of the public and private lives of workers, especially between the home and the workplace. Therefore, unlike Marx, Weber did not see capitalism as primarily the consequence of changes in the means of production.^[43]

Capitalism, for Weber, was the most advanced economic system ever developed over the course of human history. Weber associated capitalism with the advance of the business corporation, public credit, and the further advance of bureaucracy of the modern world. Although Weber defended capitalism against its socialist critics of the period, he saw its rationalizing tendencies as a possible threat to traditional cultural values and institutions, and a possible 'iron cage' constraining human freedom.^[44] This is further seen in his criticism of 'specialists without spirit, hedonists without a heart' that were developing, in his opinion, with the fading of the original Puritan 'spirit' associated with capitalism.

German Historical School and Austrian School

From the perspective of the German Historical School, capitalism is primarily identified in terms of the organization of production for markets. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus.^[33] For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary economy combined with an emphasis on the profit motive.

In the late 19th century the German historical school of economics diverged with the emerging Austrian School of economics, led at the time by Carl Menger. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter, a forerunner of the Austrian School of economics, emphasized the 'creative destruction' of capitalism — the fact that market economies undergo constant change. At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter, and many contemporary economists influenced by his work, argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change.

The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of market capitalism against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within Supply-side economics built on the work of the Austrian School, and particular emphasize Say's Law: 'supply creates its own demand.' Capitalism, to this school, is defined by lack of state restraint on the decisions of producers.

Austrian economics has been a major influence on the ideology of libertarianism, which considers laissez-faire capitalism to be the ideal economic system.

Keynesian economics

Main article: Keynesian economics

In his 1937 The General Theory of Employment, Interest, and Money, the British economist John Maynard Keynes argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. Essentially rejecting Say's law, he argued that some people may have a liquidity preference which would see them rather hold money than buy new goods or services, which therefore raised the prospect that the Great Depression would not end without what he termed in the General Theory 'a somewhat comprehensive socialization of investment.'

Keynesian economics challenged the notion that laissez-faire capitalist economics could operate well on their own, without state intervention used to promote aggregate demand, fighting high unemployment and deflation of the sort seen during the 1930s. He and his followers recommended 'pump-priming' the economy to avoid recession: cutting taxes, increasing government borrowing, and spending during an economic down-turn. This was to be accompanied by trying to control wages nationally partly through the use of inflation to cut real wages and to deter people from holding money.^[45] John Maynard Keynes provided solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work showed that regulation can be effective, and that economic stabilizers can reign in the aggressive expansions and recessions that Marx disliked. This created more stability in the business cycle, and reduced the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression.^[46]The premises of Keynes’s work have, however, since been challenged by neoclassical and supply-side economics and the Austrian School.

Another challenge to Keynesian thinking came from his colleague Piero Sraffa, and subsequently from the Neo-Ricardian school that followed Sraffa. In Sraffa's highly technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest rate of profit causes a dynamic instability in social and economic relations.

Neoclassical economics and the Chicago School

Today, most academic research on capitalism in the English-speaking world draws on neoclassical economic thought. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights, rather than privileging particular social actors; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market-based financing rather than state financing.

Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized them, in a way. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is tantamount to Smith’s argument that self interest in turn benefits the whole of society.^[47] Work like this helped lay the foundations for the coming remarketization of capitalism and the supply-side economics of Ronald Reagan and Margaret Thatcher.

The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman and monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention.^[48] Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as Keynes had argued. Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.^[49]

Neoclassical economists, today the majority of economists,^[50] consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism is the theory that economic value results from marginal utility and marginal cost (the marginal concepts). These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production.

History

Main article: History of capitalism

Elements of Capitalism

Elements of capitalism long predate the actual rise of capitalism itself. Private ownership of some means of production has existed at least in a small degree since the invention of agriculture. After the Neolithic Revolution, the increasingly advanced technology enabled farmers to trade their surpluses with other individuals, and property became more important. Before the Roman era, trading networks between different continents manifested, between Europe to as far as India and China.

The earliest forms of capitalism dates back to the Roman Empire. When the Roman Empire expanded, the mercantilist economy expanded throughout Europe. After the collapse of the Roman Empire, most of the European economy became controlled by local feudal powers, and mercantilism collapsed there. However, mercantilism persisted in Arabia. Due to its proximity to neighboring countries, the Arabs established trade routes to Egypt, Persia, and Byzantium. As Islam spread in the 7th century, mercantilism spread rapidly to Spain, Portugal, Northern Africa, and Asia. Mercantilism finally revived in Europe in the 14th century, as mercantilism spread from Spain and Portugal.^[51]

Market economies have likewise existed since the rise of the first states over 5,000 years ago.^[52] Some economic historians (like Peter Temin) argue that the economy of the Early Roman Empire was comparable to the most advanced economies of the world before the Industrial Revolution, namely the economies of 18th century England and 17th century Netherlands. There were markets for every type of good, for land, for cargo ships; there was even an insurance market.^[53]

Some writers trace back the earliest stages of merchant capitalism even further to the Caliphate during the 9th-12th centuries, where a vigorous monetary market economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organization were introduced by economists, merchants and traders during this time. Such innovations included trading companies, bills of exchange, contracts, long-distance trade, big businesses, the first forms of partnership (mufawada in Arabic) such as limited partnerships (mudaraba) (mufawada partnership possessed features similar to those of the early medieval family compagnia in Europe),^[54] and the concepts of credit, profit, capital (al-mal) and capital accumulation (nama al-mal). Many of these early capitalist ideas were further advanced in medieval Europe from the 13th century onwards.^[16][55][56]

Some writers see medieval guilds as forerunners of the modern capitalist concern (especially through using apprentices as a kind of paid laborer); but economic activity was bound by customs and controls which, along with the rule of the aristocracy which would expropriate wealth through arbitrary fines, taxes and enforced loans, meant that profits were difficult to accumulate. By the 18th century, however, these barriers to profit were overcome and capitalism became the dominant economic system of the United Kingdom and by the 19th century Western Europe.

In the period between the late 15th century and the late 18th century the institution of private property was brought into existence in the full, legal meaning of the term. Important contribution to the theory of property is found in the work of John Locke, who argued that the right to private property is a natural right. During the Industrial Revolution much of Europe underwent a thorough economic transformation associated with the rise of capitalism and levels of wealth and economic output in the Western world have risen dramatically since that period.

The Crisis of the 14th Century and the 'Pre-History of Capitalism'

According to some historians, the modern capitalist system has its origin in the 'crisis of the fourteenth century,' a conflict between the land-owning aristocracy and the agricultural producers, the serfs. Feudal arrangements inhibited the development of capitalism in a number of ways. Because serfs were forced to produce for lords, they had no interest in technological innovation; because serfs produced to sustain their own families, they had no interest in co-operating with one another. Because lords owned the land, they relied on force to guarantee that they were provided with sufficient food. Because lords were not producing to sell on the market, there was no competitive pressure for them to innovate. Finally, because lords expanded their power and wealth through military means, they spent their wealth on military equipment or on conspicuous consumption that helped foster alliances with other lords; they had no incentive to invest in developing new productive technologies.^[57]

This arrangement was shaken by the demographic crisis of the fourteenth century. This crisis had several causes: agricultural productivity reached its technological limitations and stopped growing; bad weather led to the Great Famine of 1315-1317; the Black Death in 1348-1350 led to a population crash. These factors led to a decline in agricultural production. In response feudal lords sought to expand agricultural production by expanding their domains through warfare; they therefore demanded more tribute from their serfs to pay for military expenses. In England, many serfs rebelled. Some moved to towns, some purchased land, and some entered into favorable contracts to rent lands, from lords desperate to repopulate their estates.^[58]

The collapse of the manorial system in England created a class of tenant-farmers with more freedom to market their goods and thus more incentive to invest in new technologies. Lords who did not want to rely on rents could buy out or evict tenant farmers, but then had to hire free-labor to work their estates – giving them an incentive in investing in production.^[59] This process was encouraged by the “enclosure movement,” which transferred public lands to large landowners, who used the land to graze sheep rather than produce food. As England’s wool exports grew in the fifteenth century, the process of enclosure accelerated, forcing many tenant-farmers to give up farming and seek wage-labor.^[60] According to Karl Marx, the rise of the contractual relationship is inextricably bound to the end of the obligatory relationship between serfs and lords. Marx characterizes this transformation as “the historical process of divorcing the producer from the means of production.”^[61] It was this “divorcing” that turned the serf’s land into the lord’s capital. According to Marx, this rearrangement led to a new division of classes:

two very different kinds of commodity owners; on the one hand, the owners of money, means of production, means of subsistence, who are eager to valorize the sum of value they have appropriated by buying the labour power of others; on the other hand, free workers, the sellers of their own labor-power, and therefore the sellers of labour. Free workers, in the double sense that they neither form part of the means of production themselves … nor do they own the means of production” that transformed land and even money into what we now call “capital.”^[62]

Marx labeled this period the 'pre-history of capitalism'.^[63]

It was, in effect, feudalism that began to lay some of the foundations necessary for the development of mercantilism, a precursor to capitalism. Feudalism took place mostly in Europe and lasted from the medieval period up through the 16th century. Feudal manors were almost entirely self sufficient, and therefore limited the role of the market. This stifled the growth of capitalism. However, the relatively sudden emergence of new technologies and discoveries, particularly in the industries of agriculture ^[64] and exploration, revitalized the growth of capitalism. The most important development at the end of Feudalism was the emergence of “the dichotomy between wage earners and capitalist merchants”.^[65] With mercantilism, the competitive nature means there are always winners and losers, and this is clearly evident as feudalism transitions into mercantilism.

Mercantilism

Main article: Mercantilism

Most mainstream sources convey mercantilism, an early stage of capitalism, as the economic and political system of the early modern period, through the 16th to 18th centuries.^[66][67][68] During this period, also known as merchant capitalism,^[33][16] the non-agricultural sector expanded heavily, increased colonization, international conflicts, and wars persisted. This period was also associated with geographic discoveries by overseas merchants, especially from England and the Low Countries; the European colonization of the Americas; and the rapid growth in overseas trade. The associated rise of a bourgeoisie class eclipsed the prior feudal system. It is mercantilism that Adam Smith argued against in his Wealth of Nations.

Mercantilism emerged from the 16th century after the consolidation of power by lords during the feudal era into large, powerful nation-states. The development of mercantilism has allowed relatively increased trade. The rise of bullionism increased usage of precious metals as a currency.^[69]

Mercantilism flourished during this time for a variety of reasons, and its existence was a necessary precursor to early capitalism. There are two historical events that contributed to this. First, the Renaissance gave several philosophical justifications for a market-oriented society from some of the foremost thinkers of the era. New ideas were flourishing, and there was a shift away from religious thinking, whose lofty ideals and stringent rules restricted the growth of markets. Second, the Protestant Reformation was instrumental in further refuting certain religious ideals. Calvinism preached the messages of disciplined investing and acceptance of business, which led to the development of a self-interested economy that could detach itself from religious beliefs.^[70]

Voyages of discovery were taking place, leading to rampant colonization of lands outside of Europe and the finding of new resources and commodities. This is the peak of the Dutch Hegemony, with the Dutch East India Company serving as the epitome of a joint stock company that promoted trade. Trade developed, but there is an important distinction to be made between trade during mercantilism and trade as it exists in a capitalistic society. Trade during the mercantilist era took place between the Old World (Europe) and the New World (Americas) and was governed and funded by the states, not private firms. The trade taking place was a precursor to the Industrial Revolution and modern industrial capitalism.

The rise of bullionism, a major tenet of mercantilism, led to increased usage of various precious metals, such as gold and silver, for currency. It argued that a state should export more goods than it imported so that foreigners would have to pay the difference in precious metals. Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods.^[18] Mercantilists asserted that only raw materials that could not be extracted at home should be imported; and promoted government subsidies, such as the granting of monopolies and protective tariffs, were necessary to encourage home production of manufactured goods.

Under mercantilism, European merchants, backed by state controls, subsidies, and monopolies, made most of their profits from the buying and selling of goods. In the words of Francis Bacon, the purpose of mercantilism was 'the opening and well-balancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices…'^[71] Similar practices of economic regimentation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of absolutism, the state superseded the local guilds as the regulator of the economy.

Where guilds were in control they shaped labour, production and trade; they had strong controls over instructional capital, and the modern concepts of a lifetime progression of apprentice to master craftsman, journeyer, and eventually to widely-recognized master and grandmaster began to emerge. The guilds during that time essentially functioned like cartels that monopolized the quantity of craftsmen to earn above-market wages.^[72] The guilds enforced their monopoly by the letters patents, which prohibited anyone working in an industry that they chose, unless they practiced an apprenticeship with for many years.

Economist James Denham-Steuart published Inquiry into the Principles of Political Oeconomy, which many consider as the most complete survey explaining the pricing fluctuations, interest, and land. As a mercantilist economist, he advocated import quotas and subsidies to encourage exports. Additionally, he analysed two theories of price, the first 'long-run' labor theory of value and the 'short-run' supply and demand theory of prices. Also, Steuart introduced the theory of equilibrium and the diminishing returns theory of land.^[73]

Proponents of mercantilism emphasized state power and overseas conquest as the principal aim of economic policy. If a state could not supply its own raw materials, according to the mercantilists, it should acquire colonies from which they could be extracted. Colonies constituted not only sources of supply for raw materials but also markets for finished products. Because it was not in the interests of the state to allow competition, held the mercantilists, colonies should be prevented from engaging in manufacturing and trading with foreign powers.

Commercialism

At the period of the 18th century, the commercial stage of capitalism transcended from the previous domination of capitalism by merchants. Commercialism, or commercial capitalism, originated from the start of the British and Dutch East India Company.^[74][16] These companies were characterized by its monopoly on trade, granted by the letters patents. Recognized as chartered joint-stork companies by the state, these companies enjoyed a large sum of power, ranging from lawmaking, military, and treaty-making privileges.^[75] Characterized by its colonial and expansionary powers by states, powerful nation-states sought to accumulate precious metals, and military conflicts arose.^[16] During this era, merchants, who had traded under the previous stage of mercantilism, invested capital in the East India Companies and other colonies, seeking a return on investment.

Industrialism

See also: Industrial Revolution

By the late 18th century, mercantilism was in crisis: mercantile activity could not produce sufficient wealth to pay for the military expenditures of the states that protected, and depended on, commerce. This crisis intensified with the Industrial Revolution. Although mercantilist policies endured in European countries with weak industrial bases, such as Prussia and Russia, into the 19th century, rapidly industrializing countries began questioning the value of mercantilist policies by the late 18th century. This is most evident in Great Britain, the home of the Industrial Revolution, where a new group of economic theorists, led by David Hume^[76] and Adam Smith, in the mid 18th century, challenged fundamental mercantilist doctrines as the belief that the amount of the world’s wealth remained constant and that a state could only increase its wealth at the expense of another state.

At the same time that philosophers and politicians were debating the merits of mercantilism, the mid-18th century gave rise to an alternative set of economic relations and practices: industrial (bourgeois) capitalism.^[74][16] Most scholars agree that the emergence of capitalism was made possible by earlier economic developments in England. According to Marxists, it was made possible by the exploitation of wage-labor on a large scale, which English landowners first experimented with after the crisis of the 14th century. According to World Systems Theorists like Immanuel Wallerstein, it was made possible by the accumulation of vast amounts of capital under the merchant phase of capitalism.

During the resulting Industrial Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, capitalism marked the transformation of relations between the British landowning gentry and peasants, giving rise to the production of cash crops for the market rather than for subsistence on a feudal manor. The surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture and the rise of the bourgeoisie.

Marx dated industrial capitalism from the last third of the 18th century, marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routinization of work tasks; and finally established the global domination of the capitalist mode of production.^[33] In the midst of this newly developing concept of division of labor came exploitation of labor on a much larger scale than was ever seen before.^[77]

Britain also abandoned its protectionist policy, as embraced by mercantilism. In the 19th century, Richard Cobden and John Bright, who based their beliefs on the Manchester School, initiated a movement to lower tariffs.^[78] In the 1840s, Britain adopted a less protectionist policy, with the repeal of the Corn Laws and the Navigation Acts.^[33] Britain reduced tariffs and quotas, in line with Adam Smith and David Ricardo's advocacy for free trade. As noting the various pre-capitalist features of mercantilism, Karl Polanyi argued that capitalism did not emerge until the establishment of free trade in Britain in the 1830s. Other sources indicate that mercantilism fell after the repeal of the Navigation Acts in 1849,^[79][69][78] and libertarians argue that the current system is still mercantilist.^[80]

However, due to companies legislation, British capitalism was not exclusively laissez-faire.^[81] The British state created charters, creating immunites for the coporations under the Limited Liability Act 1855 and the Joint Stock Companies Act 1856. The British East India Company and controls in major industries during that time were also important examples of economic regulations. See List of Acts of Parliament of the United Kingdom Parliament, 1840-1859 and History of labour law in the United Kingdom.

Most of the early proponents of the liberal theory of economics in the United States subscribed to the American School. This school of thought was inspired by the ideas of Alexander Hamilton, who proposed the creation of the First National Bank and the Second National Bank and increased tariffs (e.g. tariff of 1828) to favor northern industrial interests. Following Hamilton's death, the more abiding protectionist influence in the antebellum period came from Henry Clay and his American System.

In the mid-19th century, the United States followed the Whig tradition of economic liberalism, which included increased state control, regulation and macroeconomic development of infrastructure.^[82] Public works such as the provision and regulation transportation such as railroads took effect. The Pacific Railway Acts provided the development of the First Transcontinental Railroad.^[82] In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872).

Following the American Civil War, the movement towards a mixed economy accelerated with even more protectionism and government regulation. In the 1880s and 1890s, significant tariff increases were enacted (see the McKinley Tariff and Dingley Tariff). Moreover, with the enactment of the Interstate Commerce Act of 1887, the Sherman Anti-trust Act, the federal government began to assume an increasing role in regulating and directing the country's economy.

Monopolism

See also: Gilded Age and Progressive Era

In the late 19th century, the control and direction of large areas of industry came into the hands of financiers. This period has been defined as state capitalism, state monopoly capitalism, or corporate capitalism,^[80][83][84] characterized by the subordination of processes of production to the accumulation of profits in a financial system.^[18] Major characteristics of capitalism in this period included the establishment of large industrial cartels or monopolies; the ownership and management of industry by financiers divorced from the production process; and the development of a complex system of banking, an equity market, and corporate holdings of capital through stock ownership.^[18] Increasingly, large industries and land became the subject of profit and loss by financial speculators.

From about the American Civil War^[85][86] to the early 20th century, capitalism has also been increasingly influenced by large, monopolistic corporations. The oil, telecommunication, railroad, shipping, banking and financial industries are characterized by its monopolistic domination. Inside these corporations, a division of labor separates shareholders, owners, managers, and actual laborers.^[87] Although the concept of monopoly capitalism originated among Marxist theorists,^[88] non-Marxist economic historians have also commented on the rise of monopolies and trusts in the period. Murray Rothbard, asserting that the large cartels of the late 19th century could not arise on the free market, argued that the 'state monopoly capitalism' of the period was the result of interventionist policies adopted by governments, such as tariffs, quotas, licenses, and partnership between state and big business.^[85]

By the last quarter of the 19th century, the emergence of large industrial trusts had provoked legislation in the U.S. to reduce the monopolistic tendencies of the period. Gradually, during this Progressive Era, the U.S. federal government played a larger and larger role in passing antitrust laws and regulation of industrial standards for key industries of special public concern. However, contemporary, non-bourgeois economic historians believe these new laws were in fact designed to aid large corporations at the expense of smaller competitors.^[89] By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem, although such problems were most likely caused by government intervention (according to the bourgeoisie of the time), not failures in free markets (Rand 1967, Friedman 1962, Bernstein 2005). In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism’s long-term survival prospects. In the early 20th century, a succession of U.S. Presidents, beginning with Warren Harding's 'Return to Normalcy,' the state decreased taxation rates, with the Revenue Act of 1924 and 1926. This allowed for the prosperity of 'The Roaring Twenties,' but later was said to be largely responsible for the Great Depression.^[90] During the 1930s, Marxist commentators often posited the possibility of capitalism's decline or demise, often in alleged contrast to the ability of the Soviet Union to avoid suffering the effects of the global depression.^[91]