Capitalism is an economic system in which private individuals and business firms carry on the production and exchange of goods and services through a complex network of prices and markets. Although rooted in antiquity, capitalism is primarily European in its origins; it evolved through a number of stages, reaching its zenith in the 19th century. From Europe, and especially from England, capitalism spread throughout the world, largely unchallenged as the dominant economic and social system until World War I (1914-1918) ushered in modern communism (or
Marxism) as a vigorous and hostile competing system.
The term capitalism was first introduced in the mid-19th century by Karl Marx, the founder of communism. Free enterprise and market system are terms also frequently employed to describe modern non-Communist economies. Sometimes the term mixed economy is used to designate the kind of economic system most often found in Western nations.
The individual who comes closest to being the originator of contemporary capitalism is the
Scottish philosopher Adam Smith, who first set forth the essential economic principles that undergird this system. In his classic An Inquiry into the Nature and Causes of the Wealth of
Nations (1776), Smith sought to show how it was possible to pursue private gain in ways that would further not just the interests of the individual but those of society as a whole. Society's interests are met by maximum production of the things that people want. In a now famous phrase, Smith said that the combination of self-interest, private property, and competition among sellers in markets will lead producers “as by an invisible hand” to an end that they did not intend, namely, the well-being of society.
THE RISE OF INDUSTRIALIZATION
The development of industrial capitalism had serious human costs. The early days of the
Industrial Revolution were marred by appalling conditions for large numbers of workers, especially in England. Abusive child labor, long working hours, and dangerous and unhealthy workplaces were common. These conditions led Karl Marx, who spent most of his adult life in
England, to produce his massive indictment of the capitalistic system, Das Kapital (3 volumes,
1867-94). Marx's work, which is the intellectual foundation for the kind of Communist economic systems used in the former Union of Soviet Socialist Republics (USSR), struck at the fundamental principle of capitalism—private ownership of the means of production. Marx believed that land and capital should be owned collectively (that is, by society) and that the products of the system should be distributed according to need.
Capitalism was also beset by cycles of "boom and bust," periods of expansion and prosperity followed by economic collapse and waves of unemployment. The classical economists who refined the ideas of Adam Smith had no ready explanation for the ups and downs of economic life, being content to view such cycles as the inevitable price that society had to pay for the material progress experienced under capitalism. Marxian criticisms, along with frequent depressions in the major capitalist nations, helped establish vigorous trade-union movements that fought to raise wages, shorten working hours, and improve working conditions.
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In the late 19th century, especially in the United States, the modern corporation, with its limited liability and immense financial power, began to emerge as the dominant form of business organization. The tendency toward corporate control of manufacturing led to many attempts to create combines, monopolies, or trusts that could control an entire industry. Eventually, the public outcry against such practices was great enough in the United States to lead Congress to pass antitrust legislation. This legislation attempted to make the pursuit of monopoly by business illegal, using the power of the state to force at least a bare minimum of competition in industry and commerce. The antitrust laws never succeeded in restoring to industry the competition of many small businesses that Adam Smith had envisaged, but it did impede the worst tendencies toward creating monopolies and restraining trade.
Despite such difficulties, capitalism continued to expand and prosper almost without limit throughout the 19th century. It was successful because it demonstrated an enormous ability to create new wealth and to raise the real standard of living for nearly everyone touched by it. As the century closed, capitalism was the dominant economic and social system.
20TH-CENTURY CAPITALISM
For most of the 20th century capitalism was buffeted by wars, revolution, and depression. World
War I brought revolution and a Marxist-based communism to Russia. The war also spawned the
Nazi system in Germany, a malevolent mixture of capitalism and state socialism, brought together in a regime whose violence and expansionism eventually pushed the world into another major conflict. In the aftermath of World War II (1939-1945), Communist economic systems took hold in China and Eastern Europe. However, as the Cold War came to an end in the 1980s and the former Soviet-bloc nations turned to free enterprise (though with mixed success at first),
China was the only major power to retain a Marxist regime. Many of the developing nations, strongly influenced by Marxist ideas in the early postcolonial period, turned to a modified form of capitalism in their search for answers to economic problems.
In the industrial democracies of Western Europe and North America, the sharpest challenge to capitalism came in the 1930s. The Great Depression was by far the most severe economic upheaval endured by modern capitalism since its beginnings in the 18th century. Contrary to the logic of Marx's prophecy, however, Western nations failed to collapse into revolution. Rather, in meeting the challenge of the Depression, these capitalist systems demonstrated remarkable abilities for survival and adaptability to change. Democratic governments began to intervene in the economy to correct the worst abuses inherent in capitalism.
In the United States, for example, the New Deal administration of President Franklin D.
Roosevelt restructured the financial system so as to prevent a repeat of the speculative excesses that had led to financial collapse in 1929. Action was taken to encourage collective bargaining and build a strong labor movement in order to offset the concentration of economic power in large industrial corporations. The foundation for the modern welfare state was laid through the introduction of Social Security and unemployment insurance, measures designed to protect people from the economic hazards endemic to a capitalist system.
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The most important intellectual event in the development of contemporary capitalism was the publication by the British economist John Maynard Keynes of General Theory of Employment,
Interest and Money (1936). Like Adam Smith's ideas from an earlier era, Keynes's thought profoundly affected the way in which capitalism worked in Western democracies.
Keynes demonstrated that it is possible for a modern government to use its powers to spend money, vary taxes, and control the money supply in ways that can dampen down, if not eliminate, the age-old curse of capitalism—cycles of “boom and bust.” According to Keynes, in a depression, government should increase its spending, even at the cost of unbalanced budgets, to offset the decline in private spending. The process should be reversed if a boom threatens to get out of hand, leading to excessive speculation and inflation. The Keynesian viewpoint became incorporated into U.S. law when Congress passed the Employment Act of 1946. This act, which committed the American government to maintaining high levels of employment and production, is a legal landmark representing the formal abandonment of laissez-faire as national policy.
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