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This text is part of
the Liberalism series
Liberalism in countries
Liberal parties
Liberal thinkers
Liberal International
Liberal leaders
History of liberal parties

Freedom (political)
Liberal democracy
Rule of law

Classical liberalism
Green liberalism
New liberalism
Political liberalism
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Social liberalism

Other ideologies
outside the series:
Christian democracy
Liberal conservatism
Liberal Islam
Social democracy
Capitalism generally refers to

Table of contents
1 Etymology
2 Capitalism as an economic system
3 Characteristics of capitalist economies
4 Criticisms of capitalism
5 Capitalism and imperialism
6 Capitalism as an ideology
7 Arguments for and against capitalism
8 Why does no one agree what capitalism is?
9 In whose interest is capitalism?
10 What is capitalism good for?
11 See also
12 External links


The lexical roots of the word capital reveal 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.

Often thought of as the "father of capitalist thinking," Adam Smith himself never used the term. He described his own preferred economic system as "the system of natural liberty."

Though popular with Marxists, the word "capitalism" was in fact not used by Karl Marx, who only spoke about capital, to refer to the social relationship between owners (capitalists) and workers (proletarians); although it is not completely clear who used the word in its current, systemic context first, it was coined and introduced into the economic discourse by Werner Sombart in his 1906 classic, Modern Capitalism.

Capitalism as an economic system

There is much debate over how to define capitalism. Some proponents of capitalism (like Milton Friedman) emphasize the role of (presumably efficient) free markets, which, they claim, promote freedom and democracy. 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 had 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.

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 by their use. Thus not only are pins commodities; shares of ownership in a factory that makes pins become commodities; then options on shares of stock become commodities; then portions of interest rates on bonds become commodities, and so on. The predominance of commodity speculation in modern capitalism very much shapes its results.

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, the enterprise may buy or rent a piece of land and a building; it may buy machinery and hire workers (labor-power). The commodities produced by the workers are sold by the capitalist, who pays the workers a portion for their labor, pays other overhead costs, and keeps the rest as profit. If more money is needed than the initial owners are willing to provide, the business may 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.

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 traders, partnerships and sometimes cooperatives, credit unions, 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 capitalism can be said to have begun, 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):

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 any 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 in rough proportion to the profits currently being generated and/or expected to be generated by that productive capacity in the future. 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 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 necessarely result in a positive impact on society.

Characteristics of capitalist economies

Economic growth

Capitalist economies have shown an erratic but sustained tendency towards economic growth, when measured as an increase in GDP. They have on occasion been through nearly 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, while others maintain that it was government intervention that caused such disasters. The former argue that it is only government intervention that has enabled capitalist economies to ever grow at all, or even 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, or some form of 'imperialism'. Others have argued that the natural tendency of capitalism is to continuous growth and that government intervention in the form of subsidies and taxes is the cause of depressions. Yet others argue that growth, or often growth without enough freedom, 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.

It should be noted, however, that many economic systems that have existed for significant periods of time have also exibited economic growth. Thus, although such growth is an aspect of capitalism, it is by no means unique to capitalist economies.

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. 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.

The distribution of wealth in capitalist economies is one of its most contentious issues. To properly visualise the shape of these distributions it is useful to imagine what it would be like if some other commonly known characteristic of people were to be distributed this way. 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, while others don't see it as a problem.

Arguments directed against unfairness or disfunctionality have a tendency to go roughly as follows. Most characteristics of people, such as height or weight, and it might be surmised people's ability to be productive, 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 very few people who are twice as high, as average, or who can run twice as fast or have twice as high an IQ. The fact that capitalism doesn't distribute wealth in a similar fashion must mean either that people do not exhibit their full productivity under capitalism, or that those with greater wealth inherently use the capitalist system as a way of enforcing the "exploitation" of those with less economic power by not fully rewarding employee productivity or by stealing the creative ideas of others, in the form of modern copyright laws which favor the legal copyright holder and not the actual creator. Thus they accumulate more wealth for themselves in a cyclical fashion (as the old statement goes "the rich get richer").

Arguments of people who don't see uneven wealth distribution as a problem tend to argue that it is associated with, or a byproduct of, the overall increase in total of wealth, and often that it is more important that a high proportion of people have enough wealth to live above a minimum standard, rather than that everyone have a similar amount. Free market theories are often used in which 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.

Another outlook that downplays the blame of capitalism for disparities in wealth distribution is that economic systems are not even the main culprit. The economist Thomas Sowell has attributed factors such as geography, climate, culture, and natural resources as primary reasons for inequity. Alternatively, the claim is made that capitalist economics is not a zero-sum game and that wealth is not "distributed", but actually "created" through innovation, and risk-taking. The writer P.J. O'Rourke has explained this view by comparing the alternative perspective to a pizza where people taking too many slices leaves somebody with just the box. By this way of thinking, the "pizza" (or zero-sum) model of wealth is a drastic oversimplification. In response, critics of capitalism have argued that even if these arguments could justify some economic inequity, they cannot explain the extreme inequality that capitalism brings with it.

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

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 wtructure

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] has examples of networks of company board members. 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. If economic practices can be mapped to a fitness landscape in which optimization of the distribution of wealth is evolved then both viewpoints are valid, since random and chaotic fluctuations could be viewed as mutations. It is possible that capitialism is a local optima or maxima, but this is dependent on the valuation of the goals for the distribution of wealth, such as the goodness of equal distribution or the reduction of waste.

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.


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, most 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%. Some economists have used the term the "natural rate of unenployment" to describe this situation. Occasionally employment rates 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. Some political figures have claimed that the "natural rate of unemployment" shows the inefficencies of a capitalist economy, since not all resources, human labor in this case, are efficiently allocated.

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"). Opponents of capitalism counter this by pointing out that the average inflation-adjusted hourly wage in the United States is below what it was 35 years ago.

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 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.

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 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 external to our perceptions of it (the system of the private ownership of capital goods) is certainly different from "capitalism" as an ideology (the philosophical advocacy of that system). Of course, 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 her- or himself a capitalist, and vice versa.

Some argue that capitalism as a system and capitalism as an ideology go hand in hand. This view is often founded upon crude Marxism, i.e., the idea that one's ideology is almost completely a reflection of the underlying economic realities -- or the simplification of those realities which holds that people favor ideologies which justify their behavior or privilege.

Whether capitalism is (as Marx held) the natural ideology of the class of business owners (capitalists) is itself controversial, though. Business corporations have frequently favored forms of mercantilism, under which the state supports domestic business against foreign interests. Mercantilism is sometimes identified as a form of capitalism, and sometimes not. Modern Japanese capitalism after World War II might be seen as capitalist mercantilism, while the European mercantilism of the period before 1600 or so has been seen by some economic historians as being pre-capitalist. Further, Austrian school economists regard mercantilist policies as an interference with free-market capitalism.[1] For them, "capitalism" by definition involves free markets.

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:

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

Some ideologies oppose capitalism and support a collectively run economy:

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 at least five 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 encourage traits and behaviors we find virtuous or proper in human beings? Can a successful participant in a capitalist economy also be a moral or virtuous person? Yes: Ludwig von Mises, Ayn Rand, Robin Hanson No: John McMurtry, Karl Marx, Vladimir Lenin

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? Is it compatible with the rule of law? Yes: Buckminster Fuller, John McMurtry, Friedrich Hayek No: Karl Marx, Peter Kropotkin, Vladimir Lenin

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, Rosa Luxemburg

Is capitalism sustainable? Can it persist as a means of organizing human affairs, under any conceivable set of reforms as per the above? Can it overcome both political challenges (such as socialist revolutionism) and material challenges (such as limited natural resources)? Yes: Buckminster Fuller, Paul Hawken No: Joseph Schumpeter, Karl Marx, Vladimir Lenin, Leon Trotsky

Often, when political polemicists use the word "capitalism," they actually have in mind a more specific and recent phenomenon, finance capitalism, i.e. the purchase and sale of corporate debt and equity, often on liquid secondary markets. This brings up a fifth question: does finance capitalism undermine industrial capitalism? There are those, from Thorstein Veblen to Mahathir bin Mohamed who have contended that finance undermines the productive economy, while others from Eugen von Böhm-Bawerk to George Soros who have replied that financial profit-seeking prods and complements industrial capitalism.

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 McMurtry, 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, certain parties that were traditionally opposed to capitalism, e.g. the Communist Party of China, see some role for it in the development of their society. In such cases, debate focuses on incentive systems, not on the overall moral structure or ethical clarity of "capitalism". Former anti-capitalist groups holding such views are generally seen as having "switched sides", however, and they are often no longer on good terms with their old allies.

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. Like biology, or ecology and its relationship to animal behavior, it is 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 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

External links