An in-depth interpretation of Capitalism: History, Characteristics and Future Prospects

Explore the definition, development history, core characteristics, advantages and disadvantages and various forms of capitalism. A better understanding of this complex economic system through 8 values ​​tests of political values.

Capitalism is one of the most important economic systems in the modern world, and has profoundly influenced the global social, economic and political landscape. However, scholars have not reached a general consensus on the definition of "capitalism". Whether it is a kind of social form covering the entire social form, a specific social order, or is just an important part of society, remains to be discussed. Understanding the concept of capitalism is often deeply influenced by its critics and Karl Marx and his followers.

Understanding the fundamental principles, evolution and actual performance is crucial when exploring this complex and changing economic system. This article will comprehensively and in-depth analysis of all aspects of capitalism, including its definition, history, core characteristics, main types, advantages and disadvantages, as well as its relationship with other social institutions such as democracy and socialism, and look forward to its future development trends. Whether you are an economics enthusiast or a user who wishes to better understand your own economic concepts through the 8values ​​political values ​​tendency test , this article will provide you with an objective, neutral and in-depth perspective.

What is capitalism? Definition and core concepts

Capitalism is usually defined as an economic system based on the private ownership of the means of production and aims at making profits . This socio-economic system has experienced several stages of development in history, with its core components including private property , profit motivation , capital accumulation , competitive market , commodification , wage labour , and emphasis on innovation and economic growth . Typical capitalist economies tend to experience business cycles composed of economic growth and recession.

It is worth noting that the initial use of the term “capitalism” was influenced by socialist critics. Some scholars believe that the word itself has a derogatory meaning and is a misnomer of economic individualism. Economist Daron Acemoglu even suggested giving up the term "capitalism".

Etymology Exploration

The term "capitalist" appears earlier than "capitalism" and can be traced back to the mid-17th century. It originates from "capital", and "capital" evolved from the Latin word "capitale", meaning "head". "Capitale" appeared in the 12th to 13th centuries and refers to funds, commodity inventory, total amount of money or interest-bearing currency. By 1283, it was used to refer to the capital assets of trading companies and was often used interchangeably with other terms such as wealth, money, funds, goods, assets, property, etc.

The term "capitalism" was first used in its modern sense, often attributed to Louis Blanc in 1850 and Pierre-Joseph Proudhon in 1861. Karl Marx often mentions "capital" and "capitalist mode of production" in his book Das Kapital, but he rarely uses the word "capitalism".

Alternative title

In addition to "Capitalism", the system is sometimes called:

• Capitalist mode of production
• Economic liberalism
• Free enterprise
• Free enterprise economy
• Free market
• Free market economy
• Laissez-faire
• Market economy
• Profits system
• Self-regulating market

The universality of mixed economy

Most capitalist economies in the real world are mixed economies . This means they combine elements of free markets and state intervention, and in some cases even economic planning. The degree of market competition, the role of government intervention and supervision, and the scope of state ownership vary in different capitalist models. The definition of market freedom and the rules of private property rights are essentially political and policy issues.

With the 8values ​​political test , you can assess your tendency on the economic axis and better understand your views on these core concepts.

The historical evolution of capitalism: from budding to globalization

In its modern form, capitalism has gone through a long process of evolution, profoundly reshaping the global social and economic landscape.

Early Origins: Agraarian Capitalism and Mercantilism

The roots of modern capitalism can be traced back to the rise of Agraian Capitalism and Mercantilism in city-states such as Florence in the early Renaissance. For centuries, capital has sprouted in small areas in the form of merchants, leasing and lending activities, and the occasional small-scale employment industry.

During the Golden Age of Islam, Arabs promoted capitalist economic policies such as free trade and banking, and used Indian-Arab numerals to promote bookkeeping. These innovations are introduced to Europe through trading partner cities such as Venice and Pisa.

From the 16th to the 18th century, Mercantilism economic theory prevailed in European countries. This period was closely related to the overseas geographical expeditions of merchants, especially from the UK and the Low Countries. Mercantilism is a trading system for profit-oriented purposes, although commodity production is still mainly carried out through non-capitalist methods. Most scholars believe that the era of Merchant Capitalism and Mercantilism are the origins of modern capitalism.

Under Mercantilism, European merchants are supported by state control, subsidies and monopoly, and mainly make profits by buying and selling goods. This period was characterized by the interweaving of state power with commercial interests and imperialism. The state machine is used to promote national commercial interests overseas. Mercantilism believes that maintaining a trade surplus with other countries can increase national wealth, which is consistent with the primitive accumulation stage of capital.

Industrial Revolution and Industrial Capitalism

In the mid-18th century, a group of economic theorists represented by David Hume and Adam Smith challenged the basic theories of Mercantilism, such as the view that the total amount of world wealth remains unchanged. The Industrial Revolution established Capitalism as the dominant mode of production, characterized by factory production and complex division of labor. Industrial capitalists replaced merchants and became the dominant factor in the capitalist system.

In his 1776 book The Wealth of Nations, Adam Smith elaborated on the capitalist concept of driving economic growth through competition. He believes that a prosperous society should allow individuals to enter and leave the market freely and frequently switch industries. Smith firmly believes that it is crucial for the individual to pursue his own interests in order to succeed in capitalist society.

20th century to present: Keynesianism and Neoliberalism

Through the process of globalization, capitalism spread throughout the 19th and 20th centuries. In the 19th century, capitalism was largely unregulated, but became more regulated after World War II through Keynesianism . Starting from the 1980s, with the rise of Neoliberalism , capitalism once again turned to a less regulated state.

After World War II, contemporary capitalist society developed in the West and continued to expand globally. These economies are often considered to be developed, characterized by developed private and public equity and debt markets, high standards of living, large institutional investors and well-funded banking systems.

With the end of the Cold War, Neoliberal Financialized Capitalism emerged as the dominant system, making capitalism a truly global order. During this period, economic growth lifted countless people out of poverty, significantly improved their living standards, and brought many innovations to improve human well-being. However, critics argue that this new form of capitalism, especially its principles of lowering taxes and deregulation, lacks support for public service investment and exacerbates the gap between the rich and the poor.

The core economic characteristics of capitalism

As an economic system and mode of production, capitalism can be summarized by the following basic characteristics.

Private property and property rights

Private Property is the cornerstone of any capitalist economy. Without laws to protect private property, capital owners will have no incentive to put capital into the market, as their profits and property may be confiscated by the government.

According to Hernando de Soto, an important feature of capitalism is the effective state protection of property rights in the formal property system. He believes that this is the process of converting material assets into capital, allowing capital to be used more efficiently in a market economy in more ways and more efficiently.

Under the private property system, capital owners, i.e. owners of means of production, can freely use their capital in the market in accordance with their own interests. Most businesses exist in the form of “for-profit” entities, whose capital allocation and production are designed to pursue profits while paying labor costs to produce products and services.

Profit motivation

Profit motivation is the driving force of capitalism. In capitalist theory, profit motivation refers to the desire to earn income in the form of profit . In other words, the existence of a company is to make profits. Profit motivation follows the rational choice theory, that is, individuals tend to pursue their own best interests. Therefore, companies realize their own and/or shareholders’ interests by maximizing their profits.

Profit motivation is believed to ensure efficient allocation of resources. For example, Austrian school economist Henry Hazlitt explained: "If there is no profit in producing an item, it means that the labor and capital put into its production are misled: the value of the resources consumed in producing the item is greater than the value of the item itself." Profit motivation drives capital accumulation and drives capital allocation for profit companies. It also allows companies to use part of their profits for future product or service research and development, or for general corporate purposes such as stock buyback programs.

Capital accumulation

Capital accumulation refers to the process of "making money" or increasing initial capital through investment in production. The core of capitalism lies in capital accumulation, that is, investing financial capital to obtain profits, and then reinvesting it in further production, forming a continuous accumulation process . In Marxist Economic Theory, this dynamic is called the law of value.

Capital accumulation forms the basis of capitalism, and economic activities revolve around investments aimed at obtaining financial profits. In this context, "capital" is defined as a monetary or financial asset invested in to earn more money, whether it is profit, rent, interest, royalties, capital gains, or other forms of return.

Competitive market and price mechanism

In a capitalist economy, market competition refers to competition among sellers by adjusting the marketing portfolio elements (price, product, distribution and promotion) in order to increase profit, market share and sales. Market competition allocates production resources to their highest value uses and encourages efficiency.

Price mechanism plays a central role in the capitalist market. The supply and demand model believes that in a perfectly competitive market, the price of a particular commodity will be balanced when the producer supply is equal to the consumer demand. This equilibrium point determines the price and quantity of the product.

Adam Smith believes that competition is the cornerstone of capitalist economic growth. He believes that a prosperous society should allow individuals to enter and leave the market freely and frequently switch industries. Smith insists that pursuing one's own interests is the key to success in capitalist society. He proposed that when an individual focuses on his own goals, social welfare will also improve, because "everyone who strives to exclude others' competition will be forced to work hard to do his own work."

However, if competition is lacking, monopoly will arise. In a monopoly situation, the market no longer determines the price by supply and demand, but by the seller sets the price.

Hire labour

Employment labor refers to the act of selling labor to an employer under a formal or informal employment contract. These transactions usually occur in the labor market , and wages are determined by the market. In Marxist economics, these owners of means of production and capital providers are often called capitalists .

Products employed by wage labor usually become undifferentiated property of employers. Employed workers refer to people who sell their labor through this method, the main source of income. Marxists believe that wage labor constitutes the basis of capitalists' exploitation of labor, which they call "Wage Slavery".

The main types and forms of capitalism

Capitalism is not a single, rigid economic system, but there are multiple variants that vary in terms of institutional composition, economic policies, and the degree of government intervention. These types are mainly characterized by private ownership of means of production, profit production of goods and services, market resource allocation and capital accumulation.

Free-Market Capitalism and Laissez-faire Capitalism

Free-Market Capitalism is an economic system in which the prices of goods and services are determined entirely by supply and demand forces, and its supporters believe that the market should be equilibrium without government policy intervention. It usually supports highly competitive markets and private ownership of means of production.

Laissez-faire Capitalism is a more extreme form of a free market economy, where the role of the state is limited to the protection of property rights. Under this model, private enterprises freely decide on investment, production, sales and pricing, and market operations are not subject to any restrictions or control.

Mixed Economy and Welfare Capitalism

In today's world, most existing capitalist economies are mixed economies . The hybrid economy combines elements of free markets and state intervention.

Welfare Capitalism is a form of capitalism that includes social welfare policies. Under this model, government intervention in price formation is minimized, but the state provides important services in areas such as social security, health care, unemployment benefits and recognition of labor rights through state collective bargaining. This model is particularly prominent in Western Europe, Nordic countries and Japan.

Government agencies regulate service standards in many industries, such as airlines and broadcasting, and fund a wide range of projects. In addition, the government regulates capital flows and uses financial tools such as interest rates to control factors such as inflation and unemployment.

State Capitalism

State Capitalism is a capitalist market economy dominated by state-owned enterprises, where Chinese enterprises operate in a commercial and profit-seeking manner. This model is characterized by the widespread influence on the economy through direct ownership or various subsidies.

Friedrich Engels believes that state-owned enterprises will be the final stage of capitalism, manifested as the ownership and management of mass production and communications by the bourgeois state. Vladimir Lenin once characterized the Soviet Russia economy as State Capitalism, believing it was an early stage of socialist development.

Financial Capitalism

Financial Capitalism refers to the economic phenomenon in which the production process obeys the accumulation of monetary profits in the financial system. In the criticism of capitalism, both Marxism and Leninism emphasize the role of financial capital as the decisive and ruling class interests in capitalist society, especially in the later stages.

Rudolf Hilferding is considered the first to propose the term "finance capitalism" for his 1910 study of the link between German Trusts, banks and monopoly. Lenin absorbed Hilferding's research in his analytical work on the relationship between imperialism in the world's great powers, Imperialism, the Highest Stage of Capitalism (1917).

Eco-capitalism and Sustainable Capitalism

Eco-capitalism , also known as "Environmental Capitalism" or "Green Capitalism", believes that capital exists in nature in the form of "Natural Capital" (an ecosystem with ecological output), and all wealth depends on it. Therefore, governments should use market-oriented policy tools such as carbon tax to solve environmental problems.

Sustainable Capitalism is a conceptual form of capitalism based on sustainable practices that aims to protect humanity and the planet while reducing externalities and has similarities to capitalist economic policies. This concept aims to integrate environmental, social and governance (ESG) aspects into risk assessments to limit externalities.

Pros and disadvantages of capitalism

As an economic system, capitalism has brought not only significant progress but also accompanied by many challenges.

The advantages of capitalism

• Economic Growth and Prosperity : Capitalism is a powerful engine that drives economic growth. It promotes the industrial revolution, the technological revolution and the green revolution. Over the past two centuries, capitalism has lifted countless people out of poverty, significantly improved living standards, and brought many innovations to improve human well-being.
• Efficiency and resource allocation : In a capitalist-driven society, enterprises face incentives to improve efficiency, produce goods needed in the market, reduce costs and avoid waste. Profit motivation ensures that resources are allocated effectively, as labor and means of production flow to where capital needs it most.
• Innovation and Product Diversity : Capitalism encourages entrepreneurs and businesses to continuously innovate and develop profitable products. This dynamic brings rich product selection and continuous technological advancement.
• Economic freedom and political freedom : Supporters believe that economic freedom is a necessary condition for political freedom. A strong state, if controlled by means of production and prices, could lead to excessive concentration of power and bureaucracy, thus infringing on freedom in other areas. The market economy provides an alternative way for governments to control the economy, reducing the risks of tyranny and authoritarianism .
• Self-organization : The capitalist economic system can self-organize into a complex system without external guidance or planning mechanisms. This phenomenon is called "spontaneous order". The market price signal allows individuals to pursue their own interests while promoting the improvement of the overall interests of society.
• Lack of better alternatives : As Winston Churchill said of democracy, some people think that capitalism, while imperfect, is the least bad of any economic system tried.

The disadvantages of capitalism

• The gap between the rich and the poor and social inequality : Capitalism has been criticized for creating huge gap between the rich and the poor and social inequality. Thomas Piketty believes that inequality is an inevitable result of capitalist economic growth, and the resulting concentration of wealth may undermine the stability of democratic societies.
• Monopoly and Exploitation : Private ownership of means of production may lead to monopoly power in the product market and labor market or buyer monopoly power. Companies with monopoly power can charge higher prices, while companies with monopoly power on the buyer can pay lower wages. Marxists believe that capitalism is essentially exploitative, and that the wages of labor are always lower than the true value of its labor.
• Ignore social and environmental benefits : Profit-seeking motivation may lead companies to ignore negative externalities caused by production, such as pollution. At the same time, the market economy may not be able to provide sufficient public goods with positive externalities, such as health care and education.
• Economic Cycle : The capitalist economy has a tendency to experience business cycles that alternate between economic growth and recession. This cycle of “prosperity and bust” is accompanied by painful recession and massive unemployment.
• Corruption and Nepotism : The profit-seeking nature of capitalism may lead to corruption and Nepotism, i.e., favoritism and close relationship between business and the state.
• Alienation and Commodification : Critics believe that under the capitalist system, workers are instrumentalized and their labor results are occupied by employers, resulting in a barrier between people and their own labor products, labor processes, similarities and others, that is, "alienation". This alienation turns labor into a kind of "hard labor of hatred."

The relationship between capitalism and democracy

The relationship between capitalism and democracy has been a controversial area in the theoretical world and in popular political movements.

Some scholars believe that democracy and capitalism support each other. Torben Iversen and David Soskice hold this view. In his book On Democracy, Robert Dahl pointed out that capitalism is beneficial to democracy because economic growth and the huge middle class are beneficial to democracy. He also believes that the market economy provides an alternative for governments to control the economy, thereby reducing the risks of tyranny and authoritarianism. In The Road to Serfdom (1944), Friedrich Hayek asserted that economic freedom embodied in capitalism is a necessary condition for political freedom. Milton Friedman and Ronald Reagan also promoted this view. Freedom House research shows that “there is a high and statistically significant correlation between the level of political freedom and the level of economic freedom.”

However, other views point out that capitalism is also accompanied by various political forms that are very different from Liberal Democracies, including fascist regimes, absolute monarchies and one-party states. Critics argue that although economic growth under capitalism has promoted democracy, this may not be the case in the future, because authoritarian regimes can use certain competitive principles of capitalism to manage economic growth without giving greater political freedom.

In Capital in the Twenty-First Century, Thomas Piketty pointed out that inequality is an inevitable result of capitalist economic growth, and the resulting concentration of wealth may undermine the stability of democratic societies and undermine the ideal of social justice on which it is based. Critics also argue that capitalism is essentially contrary to democracy because capitalist employers have power over workers in the workplace, and the more capital accumulates, the greater the power.

The comparison between capitalism and socialism

In political economy, capitalism often contrasts with socialism. The most fundamental difference between the two lies in the ownership and control of the means of production .

Ownership of means of production

• Capitalism : The means of production are owned and controlled by private or corporate. Economic activities are planned by decentralized, competitive voluntary decision-making.
• Socialism : The state or society as a whole owns and manages important means of production. Economic decision-making is carried out through a central planning approach.

Wealth fairness

• Capitalism : Not much attention is paid to the fair distribution of wealth. It prioritizes individual freedom and efficiency in the market.
• Socialism : focuses on the redistribution of wealth and resources, from the rich to the poor, in order to achieve fairness and equal opportunity. Socialism values ​​collective interests rather than opportunities for individual progress.

Economic efficiency

• Capitalism : Proponents believe that profit motivations prompt companies to develop new products that consumers need and market demand. Market competition forces companies to improve efficiency and reduce costs.
• Socialism : Critics argue that state ownership of means of production may lead to inefficiency because of lack of motivation to earn more money, management, workers and developers are unlikely to put in extra effort to push new ideas or products.

Employment status

• Capitalism : The state does not directly employ labor. This lack of government-run employment could lead to unemployment during recessions and depressions.
• Socialism : The state is the main employer. In times of economic hardship, socialist countries can order recruitment, thereby achieving full employment. Furthermore, the socialist system often provides a stronger “social safety net” for injured or permanently disabled workers.

Marx's Criticism of Capitalism and Ideas for Socialism

Philosopher Karl Marx once criticized the capitalist production system as the source of social ills, great inequality and tendency to self-destruct. Marx believes that over time, capitalist enterprises will eliminate each other through fierce competition, and the working class will grow and begin to be dissatisfied with their unfair working conditions. The solution he proposed was socialism, namely, by transferring the means of production to the working class in an equal manner .

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Outlook on Capitalism and Future Trends

Capitalism has evolved and adapted over its 250-year development process. It has promoted tremendous progress in human well-being, but it has also exposed many shortcomings such as the gap between the rich and the poor, environmental damage and social unrest.

Challenges of Contemporary Capitalism

At present, the world faces a series of pressing challenges, such as climate crisis, massive poverty, economic shocks and growing concentration of wealth. A 2020 survey by Edelman Marketing and Public Relations found that 57% of the world believe that "capitalism today does more harm than good to the world." Economists Michael Jacobs and Mariana Mazzucato point out that “the performance of Western capitalism has been problematic in recent decades”.

The call for change and the new capitalist model

Faced with these challenges, all walks of life began to reflect and reshape the social contract of capitalism. Many new ideas and suggestions emerged to broaden the criteria for measuring the success of a business so that it is not limited to profits and growth.

• Conscious Capitalism : Inspired by the practice of “moral” branding, it emphasizes that companies should go beyond profits and focus on a wider range of stakeholders.
• Inclusive capitalism : advocated by the Bank of England and The Vatican, advocating the use of capitalism to promote the public interest.
• Donut Economics : Economist Kate Raworth proposed that it aims to maintain social and earth boundaries while maintaining social and earth boundaries.
• Five capital models : Jonathan Porritt proposes to integrate natural capital, human capital, social capital, manufacturing capital and financial capital into existing economic models.
• Type B Enterprise Movement : Certified companies have a legal obligation to consider the impact of their decisions on employees, customers, suppliers, communities and the environment.
• ESG Integration : Incorporating environmental, social and governance factors into risk assessments to limit externalities.

In 2019, CEOs of more than 180 companies including Walmart, Apple, JPMorgan Chase, PepsiCo jointly issued a statement, redefining the "corporate purpose" and acknowledging that companies must re-examine their relationship with society and the environment, and go beyond simply creating profits for shareholders. They proposed that companies must invest in their employees and contribute to the improvement of human, natural and social capital rather than just focusing on financial capital.

Possible Outlook for Post-Capitalism

Some scholars speculate that the transformation of the information society may involve abandoning some of the elements of capitalism, as the "capital" required to produce and process information will become popular and difficult to control, which is closely related to disputed issues such as intellectual property rights. Some people even speculate that the development of mature nanotechnology may make capitalism obsolete, and capital will no longer be an important factor in human economic life.

Marxism believes that capitalism will eventually be replaced by socialism, which is an inevitable trend in historical development. However, this alternative process will be long, tortuous and complex. Contemporary capitalism has shown strong self-regulation and adaptability in a certain period by actively promoting scientific and technological revolution and institutional innovation, delaying the outbreak of its internal contradictions.

In short, capitalism, as a dynamic economic system, will continue to face challenges and continue to evolve. Citizens are not powerless in capitalist democratic societies. By supporting businesses that are consistent with their beliefs and continuing to demand new laws and policies, citizens can push businesses to improve their practices and thus jointly shape the future of capitalism.

If you are curious about your position in the transformation of the economic system, try the 8values ​​political test . It will help you to have a clearer understanding of your economic values ​​and understand how these values ​​fit into different capitalism or post-capitalism ideas. For more detailed introductions to different ideologies, visit 8values ​​All Results Ideology .