CAPITALISM IS AN economic system of market-driven services and production carried out by private individuals and business firms. Karl Marx coined the term capitalism as an opposite to communism/Marxism. Other terms that refer to this economic system include free enterprise and market economy. The term mixed economy refers to the combination of a market economy and taxation for governmental spending. Adam Smith originated the philosophy behind capitalism in his treatise An Inquiry into the Nature and Causes of the Wealth of Nations (1776). He argued that societal well-being could be the secondary result of the combination of self-interest, private ownership, and consumer-driven competition.
Capitalism is a socioeconomic system where the infrastructure for production is privately owned; the market coordinates buyers and sellers; everyone involved in the system has the freedom to look out for their own self-interest with maximum return from the invention of resources, labor, and time; consumers are free to spend money as they choose, creating competition for their business and as a whole; and government supervision is minimal.
Trade over long distances to procure goods was the stimulation throughout history for such developments as overland caravans to the Middle East and Asia; shipping routes from Asia to Europe and from the Americas to Europe; and the colonization of Africa, Asia, and the Americas. Emphasis on production came with industrial advancement. Before that time, however, an important figure in the capitalist system began to emerge: the entrepreneur, or risk taker. A key element in capitalism is the undertaking of activity in the expectation that it will yield gains in the future. Because the future is unknown, both the risk of loss and the possibility of gain exist.
The assumption of risk involves the specialized role of the entrepreneur. The Renaissance and Reformation brought about social change, as people demanded a right to be involved in their government and to control their personal destinies. With this emerged contemporary forms of government, with judicial, legal, and organizational structures necessary for economic growth and capitalism.
Governments began to take advantage of this form of trade to make a profit. They saw that the influx of gold and silver from a favorable trade balance would stimulate to economic activity, thus enabling the state to levy more taxes and gain more revenue. The Industrial Revolution changed the face of business, moving from small enterprises to large enterprises that employed many workers to produce large quantities of goods, and used machines for work previously done by humans or animals. Production became more specialized and factory units became the prime producers, while entrepreneurial activities became part of peripheral economic activities.
Situations for workers declined as big business demanded child labor, long working hours, and dangerous workplaces. These conditions were the impetus for Karl Marx to develop his treatise promoting communism, with business owned collectively by society, and with collective sharing of goods, services, and profits. Capitalism also experienced setbacks, with cycles of expansion, as well as economic collapses and unemployment. Corporations sought control of manufacturing with monopolies and trusts.
Public involvement led to antitrust legislation passed by the U.S. Congress to make monopolies illegal, and to the use of government power to force competition. Capitalism continued to expand and prosper because of the potential for individuals to create wealth and improve living standards. However, as the Cold War came to an end in the 1980s and the former Soviet Union nations turned to free enterprise (though with mixed success at first), nations with a free economy rose to the challenge of the changing times and adapted.
Democratic governments intervened in the economy to correct the worst abuses inherent in capitalism. 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 mod-
ern 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.
Social welfare spending by governments continued to grow; in the United States, these expenditures (along with those for defense) account for the overwhelming proportion of all federal spending. Economic growth slowed, and many nations, particularly the United States, where national, corporate, and personal debt had reached record levels, dropped into recession, with rising unemployment. The early 21st century situation needs to be seen from the perspective of the long history of capitalism, particularly its extraordinary versatility and flexibility. New demands imposed on the economic system include ending environmental pollution, as the unregulated growth of industry and the use of fossil fuel as a primary energy source have led to global warming and climate change.
see also: Economics, Cost of Affecting Climate Change; Economics, Impact from Climate Change; United States.
bibliography. Milton Friedman, Capitalism and Freedom (University of Chicago Press, 2002); Joanna Lewis and Elliot Diringer, Policy-Based Commitments in a Post-2012 Climate Framework (Pew Center on Global Climate Change, 2007); Paul McGarr, "Capitalism and Climate Change," International Socialism (v.107, 2005).
Lyn Michaud Independent Scholar
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