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Capitalism Economic System
Capitalism is an economic system and a mode of production in which trade,
industries, and the means of production are largely or entirely privately owned
and operated for profit. Central characteristics of capitalism include private
property, capital accumulation, wage labour and, in many models, competitive
markets. In a capitalist economy, the parties to a transaction typically determine
the prices at which assets, goods, and services are exchanged.
The degree of competition, role of intervention and regulation, and scope of
state ownership varies across different models of capitalism. Economists,
political economists, and historians have taken different perspectives in their
analysis of capitalism and recognized various forms of it in practice. These
include laissez-faire capitalism, welfare capitalism, crony capitalism and state
capitalism; each highlighting varying degrees of dependency on markets, public
ownership, and inclusion of social policies. The extent to which different
markets are free, as well as the rules defining private property, is a matter of
politics and policy. Many states have what are termed capitalist mixed
economies, referring to a mix between planned and market-driven elements.
Capitalism has existed under many forms of government, in many different
times, places, and cultures. Following the demise of feudalism, capitalism
became the dominant economic system in the Western world.
Capital has existed incipiently on a small scale for centuries, in the form of
merchant, renting and lending activities, and occasionally also as small-scale
industry with some wage labour (Marx was also well aware that wage labour
existed for centuries on a modest scale before the advent of capitalist industry).
Simple commodity exchange, and consequently simple commodity production,
which form the initial basis for the growth of capital from trade, have a very
long history. The "capitalistic era" according to Marx dates from the 16th
century, i.e. it began with merchant capitalism and relatively small urban
workshops. Early Islam promulgated capitalist economic policies, which
migrated to Europe through trade partners from cities such as Venice. For the
capitalist mode of production to emerge as a distinctive mode of production
dominating the whole production process of society, many different social,
economic, cultural, technical and legal-political conditions had to come
For most of human history, these did not come together. Capital existed,
commercial trade existed, but it did not lead to industrialisation and large-scale
capitalist industry. That required a whole series of new conditions, namely
specific technologies of mass production, the ability to independently and
privately own and trade in means of production, a class of workers compelled to
sell their labour power for a living, a legal framework promoting commerce, a
physical infrastructure making the circulation of goods on a large scale possible,
security for private accumulation, and so on. In many Third World countries,
many of these conditions do not exist even today, even although there is plenty
capital and labour available; the obstacles for the development of capitalist
markets are less a technical matter and more a social, cultural and political
Capitalism in its modern form can be traced to the emergence of agrarian
capitalism and mercantilism in the Renaissance.
Agrarian capitalism
The economic foundations of the feudal agricultural system began to shift
substantially in 16th century England; the manorial system had broken down by
this time, and land began to be concentrated in the hands of fewer landlords
with increasingly large estates. Instead of a serf-based system of labor, workers
were increasingly being employed as part of a broader and expanding money
economy. The system put pressure on both the landlords and the tenants to
increase the productivity of the agriculture to make profit; the weakened
coercive power of the aristocracy to extract peasant surpluses encouraged them
to try out better methods, and the tenants also had incentive to improve their
methods, in order to flourish in an increasingly competitive labor market. Terms
of rent for the land were becoming subject to economic market forces rather
than the previous stagnant system of custom and feudal obligation.
By the early 17th-century, England was a centralized state, in which much of
the feudal order of Medieval Europe had been swept away. This centralization
was strengthened by a good system of roads and a disproportionately large
capital city, London. The capital acted as a central market hub for the entire
country, creating a very large internal market for goods, instead of the
fragmented feudal holdings that prevailed in most parts of the Continent.
A painting of a French seaport from 1638 at the height of mercantilism.
The economic doctrine that held sway between the sixteenth and eighteenth
centuries is commonly described as mercantilism. This period, the Age of
Discovery, was associated with the geographic exploration of foreign lands by
merchant traders, especially from England and the Low Countries. Mercantilism
was a system of trade for profit, although commodities were still largely
produced by non-capitalist production methods. Most scholars consider the era
of merchant capitalism and mercantilism as the origin of modern capitalism,
although Karl Polanyi argued that the hallmark of capitalism is the
establishment of generalized markets for what he referred to as the "fictitious
commodities": land, labor, and money. Accordingly, he argued that "not until
1834 was a competitive labor market established in England, hence industrial
capitalism as a social system cannot be said to have existed before that date."
Robert Clive after the Battle of Plassey. The battle began East India Company
rule in India.
England began a large-scale and integrative approach to mercantilism during the
Elizabethan Era (1558–1603). A systematic and coherent explanation of balance
of trade was made public through Thomas Mun's argument England's Treasure
by Forraign Trade, or the Balance of our Forraign Trade is The Rule of Our
Treasure. It was written in the 1620s and published in 1664.
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 wellbalancing 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 ..."
The British East India Company and the Dutch East India Company inaugurated
an expansive era of commerce and trade. These companies were characterized
by their colonial and expansionary powers given to them by nation-states.
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.
Industrial capitalism
A Watt steam engine. The steam engine fuelled primarily by coal propelled the
Industrial Revolution in Great Britain.
A new group of economic theorists, led by David Hume and Adam Smith, in the
mid-18th century, challenged fundamental mercantilist doctrines such 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.
During the Industrial Revolution, the industrialist replaced the merchant as a
dominant factor in the capitalist system and affected the decline of the
traditional handicraft skills of artisans, guilds, and journeymen. Also during this
period, the surplus generated by the rise of commercial agriculture encouraged
increased mechanization of agriculture. Industrial capitalism marked the
development of the factory system of manufacturing, characterized by a
complex division of labor between and within work process and the routine of
work tasks; and finally established the global domination of the capitalist mode
of production.
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. In the 1840s,
Britain adopted a less protectionist policy, with the repeal of the Corn Laws and
the Navigation Acts. Britain reduced tariffs and quotas, in line with David
Ricardo's advocacy for free trade.