You certainly know that we live in a capitalist world, but after all, what does that mean? What are the characteristics of our society today that make our economies considered capitalist? How did the capitalist system emerge? In this article we will discuss what capitalism is, its origin and what are the main advantages and disadvantages of this mode of production.
Definition of Capitalism
Capitalism is an economic system that seeks profit and the accumulation of wealth. It is based on private ownership of the means of production. The means of production can be machines, land, or industrial facilities, which function to generate income through labor.
There are two main social classes in this system: the capitalists (or bourgeoisie) and the workers (proletarians). Capitalists are the owners of the means of production, they employ workers and pay wages. The proletarians, in turn, offer their labor to perform certain work in exchange for remuneration. We can say that capitalism is the opposite of socialism, because it promotes collective ownership of the means of production – not private property.
Free Markets and the Profit Motive
Under capitalism, products are sold on a free market, with little or no government interference. In this case, companies sell their products according to the laws of supply and demand. That is, according to the quantity of products that are produced and in stock. As well as according to the demand of consumers for services and consumer goods.
Let’s think about the example of the automobile industry. The capitalists are the owners of the company. They are the owners of all the machines used in the production and sales of cars. Such as trucks, distribution software and stores.
The proletarians work for this industry and receive a salary in return for their activities. At the end of the process, after the cars are sold, the capitalists receive the money paid by the buyers. Of this money, a part is paid in salaries, another part is paid in taxes, fees and operating costs. The rest of the money is considered to be profit. This capital can go to the partners, or it can be reinvested in the company to expand its activities.
The Origin of the Capitalist System
The capitalist system is adopted almost everywhere in the world. It emerged in the 15th century, with the weakening of the feudal system. There is a certain consensus among scholars that capitalism is now in its third phase – financial capitalism – the first two being commercial and industrial.
Although we refer to capitalism as an economic system, this mode of production directly affects political, social and economic aspects. That is, the economic system influences the organization of all aspects of society.
How Did the Capitalist System Emerge?
The capitalist system began to emerge with the decay of the production system in force until then: feudalism. Feudalism emerged in the 5th century and lasted until the 15th century, when capitalism began to take shape.
Main Characteristics of Feudalism
Feudalism was a system of economic, political and social organization in Western Europe during the Middle Ages. It was based on land tenure and estates. Feudalism was based on static social classes – there was no social mobility. People were born and died belonging to the same social class. The three classes in the feudal system were: nobility, clergy and serfs.
- Nobility was the highest class, composed of landowners, the so-called feudal lords. They owned lands distributed by the king where they had absolute power. Each feudal lord determined the laws that governed his estate.
- Clergy consisted of members of the Catholic Church – the most powerful institution of feudalism. At that time, the church did not only have the function of evangelizing, it exercised powers in politics and was a great landowner.
- Serfs were the labor force of the estates. They were not entitled to wages or any social or political rights. They worked in exchange for a place to live and food.
Production in feudalism was characterized by self-sufficiency. The estates produced what would be consumed on the spot, there was no trade, nor coins. When goods were exchanged, products were exchanged for products, not products for money. However, with population growth, the development of cities and commercial activities, currency appeared. It facilitated exchange and the sources of income expanded.
During this period, open markets served as a place of commerce. With the development of commercial activity, a new economic class called the bourgeoisie emerged. The rise of this new social brought the static economic and social organization to an end. It enabled the social mobility of those who started to develop commercial activities.
Trade, unlike feudal organization, was structured around free wage labor. This change was one of the main events that led to the decline of feudalism and the beginning of the first phase of capitalism.
Phases of the Capitalist System
First Phase of the Capitalist System: Commercial Capitalism (15th – 18th Century)
This phase of capitalism is known as merchant capitalism. At that time, there was no industrialization and the system was based on trade. The economic model adopted in this period was mercantilism, whose main characteristics were:
- State control of the economy – the King controlled the market.
- Protectionism – protection of the domestic market.
- Accumulation of precious metals.
- Favorable trade balance – more exports than imports.
The belief at that time was that the wealth available in the world could not be increased, only redistributed. Thus, countries sought the accumulation of wealth through the protection of the local economy. As well, through the accumulation of metals due to the commercial exchanges they carried out with other countries. It was during this period that European nations explored the resources of their overseas colonies.
Second Phase of the Capitalist System: Industrial Capitalism (18th – 19th Century)
The shift from commercial capitalism to industrial capitalism took place amid technological and political revolutions. The Industrial Revolution began in England in 1760, and its main milestone was the introduction of the steam engine in production. It marks the beginning of the transition from manufacturing to industrial production.
Industrial production became essential. Due to the demographic growth and urbanization it was necessary that products were created and distributed with more efficiency and scale.
The revolutions were also of a political character. In 1789 the French Revolution took place. It was a movement that sought to end the political, social and economic organization in force at the time. It was a structure which offered privileges to small sections of the population and granted few rights to the people.
In this phase of capitalism, power passed into the hands of the bourgeoisie, which began to grow with the intensification of trade. The economy during the period of industrial capitalism was based on economic liberalism. This school of thought – whose main thinker was Adam Smith – proposed minimum government intervention in the economy. According to its supporters, the law of supply and demand and market competition would guarantee better results for society as a whole.
The mode of production during industrial capitalism allowed for an increase in productivity. As well as a decrease in the prices of goods and accumulation of capital. On the other hand, these advances were only possible due to precarious working conditions, very long working hours, decreased wages and high unemployment rates.
Third Phase of the Capitalist System: Financial Capitalism (20th Century)
Financial capitalism began in the 20th century, after the end of the Second World War. This new phase began when banks and companies came together to obtain greater profits. It is at this moment that multinational and transnational companies appeared, and monopolistic practices were strengthened. This model, still in force today, is based on the laws of financial institutions and multinational business groups.
This phase is characterized by high international competition, commercial monopoly, technological evolution, globalization and high rates of urbanization. It is called financial capitalism, because large companies started to sell portions of their capital on the stock exchange. From then on, capitalists started to produce wealth by speculation. During this phase capital accumulation reached levels never seen before.
As a result of liberal policies, in 1929, the capitalist system went through one of the worst economic crises in history. Due to overproduction in the United States and reduced demand for products, companies lost value and the stock market crashed. To save the market, the government had to intervene in the economy and from then on the Keynesian economic model was adopted. It defended the intervention of the State in the economy to avoid crises and guarantee consumption and employment. This system is also known as the welfare state.
Beginning in the 1980s, the ideas of John Maynard Keynes lost their appeal and the idea of minimal state intervention in the economy returned. Like liberals, defenders of neoliberalism argue that the rules of the market themselves will guarantee economic growth and social development.
Neoliberalism was implemented in many countries, following the propositions of what was established in the Washington Consensus. A neoliberal proposal for the development of less developed countries.
The Cold War and the Victory of the Capitalist System
Despite being adopted in much of the world today, the hegemony of the capitalist system was in dispute for decades. The other economic system was communism, which advocated the end of private property in favor of building a more just and egalitarian society.
Throughout the conflict, the United States – defender of capitalism – and the Soviet Union – defender of communism – sought to establish world hegemony. Both countries sought the support of other countries to strengthen their ideological position.
It was called the Cold War, because there was no direct military clash between these two countries. It was an ideological conflict sustained by an arms race. Both countries were investing in weapons and other military technologies. The balance of terror between these forces was what prevented attacks between them from actually happening. With the end of the Cold War most of the former socialist countries began to implement capitalist policies.
Informational capitalism is not a new phase of capitalism, but a new level in the phase of financial capitalism. The concept of informational capitalism was first discussed by Manuel Castells, in a book published in 1996 analyzing the technological revolution. Informational capitalism is characterized by globalization and advances in information technologies. As well as the acceleration and growth of information flows, people, capital and goods. According to this author, these technological transformations changed our cultural and social practices and established a new social structure.
Main Characteristics of Capitalism
To make it even easier to understand how this system works, in this section we will explain some main characteristics of capitalism.
Private Ownership of the Means of Production
For capitalism to function, it is necessary for the government to guarantee private property. With private property guaranteed, capital, land, machinery or any other means of production can be used freely to generate profit by their owners.
Maximum Profit Motive and Accumulation of Wealth
The objective of capitalism is to obtain ever greater profits. These profits are derived from the labor of the working class in factories, commerce and agriculture. To maximize profit, it is common for owners of the means of production to reduce the costs of their activities as much as possible. As well as raise the prices of products or services as much as possible.
Market Economy: the Law of Supply and Demand
In a free market economy, goods and services are distributed according to the law of supply and demand. There is little state intervention in prices of goods. According to this law, those who produce and sell goods are more interested in selling the higher the price of the product. If the price of the product is too low, producers will have little incentive to remain in the market.
On the demand side, the behavior is the opposite, as consumers will be more interested in consuming a cheaper product. It is a very simple relationship. If you are thirsty and intend to buy water, you will probably buy only one bottle if you consider its value high. However, if it is cheap, you will consider buying a larger amount.
When there is intense competition between producers, those who reduce prices will be able to sell more. In this dynamic, consumers always seek the lowest prices and owners of the means of production always seek the highest profits.
Paid employment in capitalist systems replaced feudal servile economic relations. In the capitalist system, the proletarians work for the bourgeoisie and receive a salary in exchange for their labor force.
Wage labor under capitalism is fundamental for maintaining the system. After all, it is with wages that workers buy goods and services and guarantee the functioning of the system. As the working class is much larger than the bourgeoisie, their consumption is essential, otherwise there would be a lack of demand. It is important to note that although capitalism is based on wage labor, practices close to slave labor are still common in some countries.
Existence of Social Classes (Capitalists and Proletarians)
This is one of the characteristics that capitalism is most criticized for. This is because there is a small portion of the population that owns the means of production. They are the only ones who are able to accumulate wealth and increase their economic power. In contrast, a very large number of working class people work to guarantee the satisfaction of their basic needs.
For reasons, such as professional qualification and educational opportunities, some workers earn good wages. It allows them comfortable living conditions and even social mobility. On the other hand, a large portion of the population receives low wages, which can decrease the conditions of mobility on the social scale.
Friedrich Hayek and the Chicago School of Economics
The Chicago School of Economics was created out of the ideals embraced by the Austrian School. In fact, Hayek was a professor in that faculty at the University of Chicago. It is a school of economic theory based on the principles of liberalism. However, Hayek’s focus remained mainly on neoliberal theory.
This economic theory is based on the idea that minimal, or even no, government intervention is best for economic prosperity. In more detail, it emphasizes the following principles:
- Privatization of state-owned companies.
- Economy guided by market forces.
- Reduction of taxes for individuals and, in particular, for large companies.
- Little or no government intervention in the economy.
- Measures against economic protectionism.
This school of thought is also based on the neoclassical theory of price and economic liberalism. While the Austrian School debated socialist convictions, the Chicago School debated Keynesianism. This theory of the English economist, John Maynard Keynes, was the most widely accepted theory of capitalism in the 20th century. Keynesian economics is still very relevant today.
The Chicago School receives harsh criticism from top economists. For example, James Tobin, a professor at Yale University and Joseph Stiglitz, former vice president of the World Bank. Both are Nobel Prize winners in Economics and do not agree with Chicago’s economic concepts.
Is There a Purely Capitalist Country?
Pure capitalism, where there is no government intervention, does not exist. Countries adopt different forms of state intervention. Some reduce the role of the State to regulating markets and offering basic services, such as education, health and security. Other countries maintain planned economies with state investment in certain sectors, for example.
One of the important roles of the State in capitalism is the guarantee of private property. This is because only the government legally recognizes the ownership of individuals’ assets. With regard to the role of the State, some countries adopt economic liberalism, with little state intervention and several privatized services. Others opt for greater state intervention and the guarantee of basic services to the population, what is known as the welfare state.
Advantages of Capitalism
Competition reduces the value of consumer goods. In markets where there is great competition, companies compete with each other to sell more of their products. As price is one of the main factors in the workers’ purchasing decision, companies adopt strategies to decrease the final price.
Lower prices can increase access – especially from the lower strata of society – to consumer goods that would be more expensive in a non-competitive market.
Efficient companies. The efficiency of companies is also closely related to competition. Consumers are free to choose companies to buy goods or hire a service from. Thus, it is logical that they seek those that, in addition to the lowest price, have better service, faster delivery and so on.
Innovation. Capitalism generates a dynamic in which entrepreneurs constantly seek to develop new products and services to satisfy or even create needs to make profits. Thus, capitalism creates a market with many options for consumers to choose from, and new technologies constantly emerge.
Consumers are free to choose. Intense competition between companies and a great diversity of products and services offered, allows consumers to decide what they want to purchase. It is clear that this freedom is related to purchasing power, but considering this limitation, people have the freedom of choice.
Disadvantages of Capitalism
Social inequality. The main objective of capitalism is to obtain profit and accumulate wealth. Naturally, it leads to the enrichment of a small portion of the population. These are usually the owners of the means of production while the lower strata of the population is impoverished.
As there is great competition and capitalists want to increase their sales, they reduce their production costs. Since wages are one of the costs of production, it is common for them to be reduced. Thus, social inequality between classes intensifies.
Economic crises. The dynamics of capitalism lead the economy to periods of growth and recession in a cyclical way. That is, at times it produces and sells a lot and there are a lot of jobs, and at other periods economic crises occur. The most famous crises of the capitalist system were: the Great Depression of 1929 and the financial crisis of 2008.
While the first was a crisis of overproduction – many products in stock and few buyers – the second was a financial crisis. The result of a collapse of the credit system in the United States.
Concentration of economic power. In the pursuit of profit and capital accumulation, some companies can become so powerful economically that they come to control the market. In the case of a monopoly – when a company alone dominates the market – the element of competition disappears.
Negative externalities. An important concept in economics are externalities. Externalities are side effects of a decision that fall on those who are not involved in the action. One of the most common negative externalities of the capitalist system is pollution. Many companies, when carrying out their activities, end up releasing pollutants, contaminating the air, water and soil, which harms the population as a whole.
The Question of Morality
You probably have witnessed discussions of defenders and opponents of capitalism – it is a very heated debate. But after all, is the capitalist system the best option? Would we live in a more just society if we adopted a different economic system?
These questions are not easy to answer, since all modes of production – feudal, capitalist, communist – have their advantages and disadvantages. On the one hand, capitalism encourages innovations and economic growth. On the other hand it intensifies social inequality and causes damage to the environment. But is it moral?
Some philosophers conclude that the system is neither moral nor immoral. Capitalism has its internal logic, which is of a different order than moral. While morality asks what is right and what is wrong, capitalism tries to answer what is more efficient, more profitable. At the end of the day, it is up to the people to make their society more just.