Capitalism is an economic system based on
the private ownership of the means of production
and their operation for profit. Characteristics
central to capitalism include private property,
capital accumulation, wage labor, voluntary
exchange, a price system, and competitive
markets. In a capitalist market economy, decision-making
and investment are determined by every owner
of wealth, property or production ability
in financial and capital markets, whereas
prices and the distribution of goods and services
are mainly determined by competition in goods
and services markets.Economists, political
economists, sociologists and historians have
adopted different perspectives in their analyses
of capitalism and have recognized various
forms of it in practice. These include laissez-faire
or free market capitalism, welfare capitalism
and state capitalism. Different forms of capitalism
feature varying degrees of free markets, public
ownership, obstacles to free competition and
state-sanctioned social policies. The degree
of competition in markets, the role of intervention
and regulation, and the scope of state ownership
vary across different models of capitalism.
The extent to which different markets are
free as well as the rules defining private
property are matters of politics and policy.
Most existing capitalist economies are mixed
economies, which combine elements of free
markets with state intervention and in some
cases economic planning.Market economies have
existed under many forms of government and
in many different times, places and cultures.
Modern capitalist societies—marked by a
universalization of money-based social relations,
a consistently large and system-wide class
of workers who must work for wages, and a
capitalist class which owns the means of production—developed
in Western Europe in a process that led to
the Industrial Revolution. Capitalist systems
with varying degrees of direct government
intervention have since become dominant in
the Western world and continue to spread.
Over time, capitalist countries have experienced
consistent economic growth and an increase
in the standard of living.
Critics of capitalism argue that it establishes
power in the hands of a minority capitalist
class that exists through the exploitation
of the majority working class and their labor;
prioritizes profit over social good, natural
resources and the environment; and is an engine
of inequality, corruption and economic instabilities.
Supporters argue that it provides better products
and innovation through competition, disperses
wealth to all productive people, promotes
pluralism and decentralization of power, creates
strong economic growth, and yields productivity
and prosperity that greatly benefit society.
== Etymology ==
The term "capitalist", meaning an owner of
capital, appears earlier than the term "capitalism"
and it dates back to the mid-17th century.
"Capitalism" is derived from capital, which
evolved from capitale, a late Latin word based
on caput, meaning "head"—also the origin
of "chattel" and "cattle" in the sense of
movable property (only much later to refer
only to livestock). Capitale emerged in the
12th to 13th centuries in the sense of referring
to funds, stock of merchandise, sum of money
or money carrying interest. By 1283, it was
used in the sense of the capital assets of
a trading firm and it was frequently interchanged
with a number of other words—wealth, money,
funds, goods, assets, property and so on.The
Hollandische Mercurius uses "capitalists"
in 1633 and 1654 to refer to owners of capital.
In French, Étienne Clavier referred to capitalistes
in 1788, six years before its first recorded
English usage by Arthur Young in his work
Travels in France (1792). In his Principles
of Political Economy and Taxation (1817),
David Ricardo referred to "the capitalist"
many times. Samuel Taylor Coleridge, an English
poet, used "capitalist" in his work Table
Talk (1823). Pierre-Joseph Proudhon used the
term "capitalist" in his first work, What
is Property? (1840), to refer to the owners
of capital. Benjamin Disraeli used the term
"capitalist" in his 1845 work Sybil.The initial
usage of the term "capitalism" in its modern
sense has been attributed to Louis Blanc in
1850 ("What I call 'capitalism' that is to
say the appropriation of capital by some to
the exclusion of others") and Pierre-Joseph
Proudhon in 1861 ("Economic and social regime
in which capital, the source of income, does
not generally belong to those who make it
work through their labour"). Karl Marx and
Friedrich Engels referred to the "capitalistic
system" and to the "capitalist mode of production"
in Capital (1867). The use of the word "capitalism"
in reference to an economic system appears
twice in Volume I of Capital, p. 124 (German
edition) and in Theories of Surplus Value,
tome II, p. 493 (German edition). Marx did
not extensively use the form capitalism, but
instead those of capitalist and capitalist
mode of production, which appear more than
2,600 times in the trilogy The Capital. According
to the Oxford English Dictionary (OED), the
term "capitalism" first appeared in English
in 1854 in the novel The Newcomes by novelist
William Makepeace Thackeray, where he meant
"having ownership of capital". Also according
to the OED, Carl Adolph Douai, a German American
socialist and abolitionist, used the phrase
"private capitalism" in 1863.
== History ==
Capitalism in its modern form can be traced
to the emergence of agrarian capitalism and
mercantilism in the early Renaissance, in
city states like Florence.Capital has existed
incipiently on a small scale for centuries
in the form of merchant, renting and lending
activities and occasionally as small-scale
industry with some wage labour. Simple commodity
exchange and consequently simple commodity
production, which are the initial basis for
the growth of capital from trade, have a very
long history. Classical Islam promulgated
capitalist economic policies such as free
trade and banking. Their use of Indo-Arabic
numerals facilitated bookkeeping. These innovations
migrated to Europe through trade partners
in cities such as Venice and Pisa. The Italian
mathematician Fibonacci traveled the Mediterranean
talking to Arab traders, and returned to popularize
the use of Indo-Arabic numerals in Europe.Capital
and commercial trade thus existed for much
of history, but it did not lead to industrialisation
or dominate the production process of society.
That required a set of conditions, including
specific technologies of mass production,
the ability to independently and privately
own and trade in means of production, a class
of workers willing to sell their labour power
for a living, a legal framework promoting
commerce, a physical infrastructure allowing
the circulation of goods on a large scale
and security for private accumulation. Many
of these conditions do not currently exist
in many Third World countries, although there
is plenty of capital and labour. The obstacles
for the development of capitalist markets
are therefore less technical and more social,
cultural and political.
=== Agrarian capitalism ===
The economic foundations of the feudal agricultural
system began to shift substantially in 16th-century
England as the manorial system had broken
down and land began to become concentrated
in the hands of fewer landlords with increasingly
large estates. Instead of a serf-based system
of labor, workers were increasingly employed
as part of a broader and expanding money-based
economy. The system put pressure on both landlords
and tenants to increase the productivity of
agriculture to make profit; the weakened coercive
power of the aristocracy to extract peasant
surpluses encouraged them to try better methods;
and the tenants also had incentive to improve
their methods in order to flourish in a competitive
labor market. Terms of rent for land were
becoming subject to economic market forces
rather than to 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 by 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, contrasting
with the fragmented feudal holdings that prevailed
in most parts of the Continent.
=== Mercantilism ===
The economic doctrine prevailing from the
16th to the 18th centuries is commonly called
mercantilism. This period, the Age of Discovery,
was associated with the geographic exploration
of the 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 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 called the "fictitious commodities",
i.e. 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".
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
by buying and selling goods. In the words
of Francis Bacon, the purpose of mercantilism
was "the opening and well-balancing 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 ===
In the mid-18th century, a new group of economic
theorists, led by David Hume and Adam Smith,
challenged fundamental mercantilist doctrines
such as the belief that 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, industrialists
replaced merchants 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.
=== Modern capitalism ===
Capitalism was carried across the world by
broader processes of globalization and by
the beginning of the nineteenth century a
series of loosely connected market systems
had come together as a relatively integrated
global system, in turn intensifying processes
of economic and other globalization. Later
in the 20th century, capitalism overcame a
challenge by centrally-planned economies and
is now the encompassing system worldwide,
with the mixed economy being its dominant
form in the industrialized Western world.
Industrialization allowed cheap production
of household items using economies of scale
while rapid population growth created sustained
demand for commodities. Globalization in this
period was decisively shaped by 18th-century
imperialism.
After the First and Second Opium Wars and
the completion of British conquest of India,
vast populations of these regions became ready
consumers of European exports. Also in this
period, areas of sub-Saharan Africa and the
Pacific islands were colonised. The conquest
of new parts of the globe, notably sub-Saharan
Africa, by Europeans yielded valuable natural
resources such as rubber, diamonds and coal
and helped fuel trade and investment between
the European imperial powers, their colonies
and the United States: The inhabitant of London
could order by telephone, sipping his morning
tea, the various products of the whole earth,
and reasonably expect their early delivery
upon his doorstep. Militarism and imperialism
of racial and cultural rivalries were little
more than the amusements of his daily newspaper.
What an extraordinary episode in the economic
progress of man was that age which came to
an end in August 1914.
In this period, the global financial system
was mainly tied to the gold standard. The
United Kingdom first formally adopted this
standard in 1821. Soon to follow were Canada
in 1853, Newfoundland in 1865, the United
States and Germany (de jure) in 1873. New
technologies, such as the telegraph, the transatlantic
cable, the radiotelephone, the steamship and
railway allowed goods and information to move
around the world at an unprecedented degree.
In the period following the global depression
of the 1930s, the state played an increasingly
prominent role in the capitalistic system
throughout much of the world. The postwar
boom ended in the late 1960s and early 1970s
and the situation was worsened by the rise
of stagflation. Monetarism, a modification
of Keynesianism that is more compatible with
laissez-faire, gained increasing prominence
in the capitalist world, especially under
the leadership of Ronald Reagan in the United
States and Margaret Thatcher in the United
Kingdom in the 1980s. Public and political
interest began shifting away from the so-called
collectivist concerns of Keynes's managed
capitalism to a focus on individual choice,
called "remarketized capitalism".According
to Harvard academic Shoshana Zuboff, a new
genus of capitalism, surveillance capitalism,
monetizes data acquired through surveillance.
She states it was first discovered and consolidated
at Google, emerged due to the "coupling of
the vast powers of the digital with the radical
indifference and intrinsic narcissism of the
financial capitalism and its neoliberal vision
that have dominated commerce for at least
three decades, especially in the Anglo economies"
and depends on the global architecture of
computer mediation which produces a distributed
and largely uncontested new expression of
power she calls "Big Other".
==== Relationship to democracy ====
The relationship between democracy and capitalism
is a contentious area in theory and in popular
political movements. The extension of universal
adult male suffrage in 19th-century Britain
occurred along with the development of industrial
capitalism and democracy became widespread
at the same time as capitalism, leading capitalists
to posit a causal or mutual relationship between
them. However, according to some authors in
the 20th-century, capitalism also accompanied
a variety of political formations quite distinct
from liberal democracies, including fascist
regimes, absolute monarchies and single-party
states. Democratic peace theory asserts that
democracies seldom fight other democracies,
but critics of that theory suggest that this
may be because of political similarity or
stability rather than because they are democratic
or capitalist. Moderate critics argue that
though economic growth under capitalism has
led to democracy in the past, it may not do
so in the future as authoritarian regimes
have been able to manage economic growth using
some of capitalism's competitive principles
without making concessions to greater political
freedom.Milton Friedman, one of the biggest
supporters of the idea that capitalism promotes
political freedom, argued that competitive
capitalism allows economic and political power
to be separate, ensuring that they do not
clash with one another. Moderate critics have
recently challenged this, stating that the
current influence lobbying groups have had
on policy in the United States is a contradiction,
given the approval of Citizens United. This
has led people to question the idea that competitive
capitalism promotes political freedom. The
ruling on Citizens United allows corporations
to spend undisclosed and unregulated amounts
of money on political campaigns, shifting
outcomes to the interests and undermining
true democracy. As explained in Robin Hahnel’s
writings, the centerpiece of the ideological
defense of the free market system is the concept
of economic freedom and that supporters equate
economic democracy with economic freedom and
claim that only the free market system can
provide economic freedom. According to Hahnel,
there are a few objections to the premise
that capitalism offers freedom through economic
freedom. These objections are guided by critical
questions about who or what decides whose
freedoms are more protected. Often, the question
of inequality is brought up when discussing
how well capitalism promotes democracy. An
argument that could stand is that economic
growth can lead to inequality given that capital
can be acquired at different rates by different
people. In Capital in the Twenty-First Century,
Thomas Piketty of the Paris School of Economics
asserts that inequality is the inevitable
consequence of economic growth in a capitalist
economy and the resulting concentration of
wealth can destabilize democratic societies
and undermine the ideals of social justice
upon which they are built.States with capitalistic
economic systems have thrived under political
regimes deemed to be authoritarian or oppressive.
Singapore has a successful open market economy
as a result of its competitive, business-friendly
climate and robust rule of law. Nonetheless,
it often comes under fire for its brand of
government which though democratic and consistently
one of the least corrupt it also operates
largely under a one-party rule and does not
vigorously defend freedom of expression given
its government-regulated press as well as
penchant for upholding laws protecting ethnic
and religious harmony, judicial dignity and
personal reputation. The private (capitalist)
sector in the People's Republic of China has
grown exponentially and thrived since its
inception, despite having an authoritarian
government. Augusto Pinochet's rule in Chile
led to economic growth and high levels of
inequality by using authoritarian means to
create a safe environment for investment and
capitalism. Similarly, Suharto's authoritarian
reign and extirpation of the Communist Party
of Indonesia allowed for the expansion of
capitalism in Indonesia.
=== Varieties of capitalism ===
Peter A. Hall and David Soskice argued that
modern economies have developed two different
forms of capitalism: liberal market economies
(or LME) (e.g. the United States, the United
Kingdom, Canada, New Zealand and Ireland)
and coordinated market economies (CME) (e.g.
Germany, Japan, Sweden and Austria). Those
two types can be distinguished by the primary
way in which firms coordinate with each other
and other actors, such as trade unions. In
LMEs, firms primarily coordinate their endeavors
by way of hierarchies and market mechanisms.
Coordinated market economies more heavily
rely on non-market forms of interaction in
the coordination of their relationship with
other actors (for a detailed description see
Varieties of Capitalism). These two forms
of capitalisms developed different industrial
relations, vocational training and education,
corporate governance, inter-firm relations
and relations with employees. The existence
of these different forms of capitalism has
important societal effects, especially in
periods of crisis and instability. Since the
early 2000s, the number of labor market outsiders
has rapidly grown in Europe, especially among
the youth, potentially influencing social
and political participation. Using varieties
of capitalism theory, it is possible to disentangle
the different effects on social and political
participation that an increase of labor market
outsiders has in liberal and coordinated market
economies (Ferragina et al., 2016). The social
and political disaffection, especially among
the youth, seems to be more pronounced in
liberal than coordinated market economies.
This signals an important problem for liberal
market economies in a period of crisis. If
the market does not provide consistent job
opportunities (as it has in previous decades),
the shortcomings of liberal social security
systems may depress social and political participation
even further than in other capitalist economies.
== Characteristics ==
In general, capitalism as an economic system
and mode of production can be summarised by
the following:
Capital accumulation: production for profit
and accumulation as the implicit purpose of
all or most of production, constriction or
elimination of production formerly carried
out on a common social or private household
basis.
Commodity production: production for exchange
on a market; to maximize exchange-value instead
of use-value.
Private ownership of the means of production:
High levels of wage labour.
The investment of money to make a profit.
The use of the price mechanism to allocate
resources between competing uses.
Economically efficient use of the factors
of production and raw materials due to maximization
of value added in the production process.
Freedom of capitalists to act in their self-interest
in managing their business and investments.
=== The market ===
In free market and laissez-faire forms of
capitalism, markets are used most extensively
with minimal or no regulation over the pricing
mechanism. In mixed economies, which are almost
universal today, markets continue to play
a dominant role, but they are regulated to
some extent by the state in order to correct
market failures, promote social welfare, conserve
natural resources, fund defense and public
safety or other rationale. In state capitalist
systems, markets are relied upon the least,
with the state relying heavily on state-owned
enterprises or indirect economic planning
to accumulate capital.
Supply is the amount of a good or service
that is available for purchase or sale. Demand
is the measure of value for a good that people
are willing to buy at a given time. Prices
tend to rise when demand for an available
resource increases or its supply diminishes
and fall with demand or when supply increases.
Competition arises when more than one producer
is trying to sell the same or similar products
to the same buyers. In capitalist theory,
competition leads to innovation and more affordable
prices. Without competition, a monopoly or
cartel may develop. A monopoly occurs when
a firm is granted exclusivity over a market.
Hence the firm can engage in rent seeking
behaviors such as limiting output and raising
prices because it has no fear of competition.
A cartel is a group of firms that act together
in a monopolistic manner to control output
and prices.
Governments have implemented legislation for
the purpose of preventing the creation of
monopolies and cartels. In 1890, the Sherman
Anti-Trust Act became the first legislation
passed by the United States Congress to limit
monopolies.
=== Profit motive ===
The profit motive, in the theory in capitalism,
is the desire to earn income in the form of
profit. Stated differently, the reason for
a business's existence is to turn a profit.
The profit motive functions according to rational
choice theory, or the theory that individuals
tend to pursue what is in their own best interests.
Accordingly, businesses seek to benefit themselves
and/or their shareholders by maximizing profit.
In capitalist theoretics, the profit motive
is said to ensure that resources are being
allocated efficiently. For instance, Austrian
economist Henry Hazlitt explains: "If there
is no profit in making an article, it is a
sign that the labor and capital devoted to
its production are misdirected: the value
of the resources that must be used up in making
the article is greater than the value of the
article itself". In other words, profits let
companies know whether an item is worth producing.
Theoretically, in free and competitive markets
maximising profit ensures that resources are
not wasted.
=== Private property ===
The relationship between the state, its formal
mechanisms and capitalist societies has been
debated in many fields of social and political
theory, with active discussion since the 19th
century. Hernando de Soto is a contemporary
Peruvian economist who has argued that an
important characteristic of capitalism is
the functioning state protection of property
rights in a formal property system where ownership
and transactions are clearly recorded.According
to de Soto, this is the process by which physical
assets are transformed into capital, which
in turn may be used in many more ways and
much more efficiently in the market economy.
A number of Marxian economists have argued
that the Enclosure Acts in England and similar
legislation elsewhere were an integral part
of capitalist primitive accumulation and that
specific legal frameworks of private land
ownership have been integral to the development
of capitalism.
=== Market competition ===
In capitalist economics, market competition
is the rivalry among sellers trying to achieve
such goals as increasing profits, market share
and sales volume by varying the elements of
the marketing mix: price, product, distribution
and promotion. Merriam-Webster defines competition
in business as "the effort of two or more
parties acting independently to secure the
business of a third party by offering the
most favourable terms". It was described by
Adam Smith in The Wealth of Nations (1776)
and later economists as allocating productive
resources to their most highly valued uses
and encouraging efficiency. Smith and other
classical economists before Antoine Augustine
Cournot were referring to price and non-price
rivalry among producers to sell their goods
on best terms by bidding of buyers, not necessarily
to a large number of sellers nor to a market
in final equilibrium. Competition is widespread
throughout the market process. It is a condition
where "buyers tend to compete with other buyers,
and sellers tend to compete with other sellers".
In offering goods for exchange, buyers competitively
bid to purchase specific quantities of specific
goods which are available, or might be available
if sellers were to choose to offer such goods.
Similarly, sellers bid against other sellers
in offering goods on the market, competing
for the attention and exchange resources of
buyers. Competition results from scarcity—there
is never enough to satisfy all conceivable
human wants—and occurs "when people strive
to meet the criteria that are being used to
determine who gets what".
=== Economic growth ===
Historically, capitalism has an ability to
promote economic growth as measured by gross
domestic product (GDP), capacity utilization
or standard of living. This argument was central,
for example, to Adam Smith's advocacy of letting
a free market control production and price
and allocate resources. Many theorists have
noted that this increase in global GDP over
time coincides with the emergence of the modern
world capitalist system.Between 1000 and 1820,
the world economy grew sixfold, a faster rate
than the population growth, so individuals
enjoyed, on average, a 50% increase in income.
Between 1820 and 1998, world economy grew
50-fold, a much faster rate than the population
growth, so individuals enjoyed on average
a 9-fold increase in income. Over this period,
in Europe, North America and Australasia the
economy grew 19-fold per person, even though
these regions already had a higher starting
level; and in Japan, which was poor in 1820,
the increase per person was 31-fold. In the
Third World, there was an increase, but only
5-fold per person.
=== As a mode of production ===
The capitalist mode of production refers to
the systems of organising production and distribution
within capitalist societies. Private money-making
in various forms (renting, banking, merchant
trade, production for profit and so on) preceded
the development of the capitalist mode of
production as such. The capitalist mode of
production proper based on wage-labour and
private ownership of the means of production
and on industrial technology began to grow
rapidly in Western Europe from the Industrial
Revolution, later extending to most of the
world.The term capitalist mode of production
is defined by private ownership of the means
of production, extraction of surplus value
by the owning class for the purpose of capital
accumulation, wage-based labour and at least
as far as commodities are concerned being
market-based.Capitalism in the form of money-making
activity has existed in the shape of merchants
and money-lenders who acted as intermediaries
between consumers and producers engaging in
simple commodity production (hence the reference
to "merchant capitalism") since the beginnings
of civilisation. What is specific about the
"capitalist mode of production" is that most
of the inputs and outputs of production are
supplied through the market (i.e. they are
commodities) and essentially all production
is in this mode. For example, in flourishing
feudalism most or all of the factors of production
including labour are owned by the feudal ruling
class outright and the products may also be
consumed without a market of any kind, it
is production for use within the feudal social
unit and for limited trade. This has the important
consequence that the whole organisation of
the production process is reshaped and re-organised
to conform with economic rationality as bounded
by capitalism, which is expressed in price
relationships between inputs and outputs (wages,
non-labour factor costs, sales and profits)
rather than the larger rational context faced
by society overall—that is, the whole process
is organised and re-shaped in order to conform
to "commercial logic". Essentially, capital
accumulation comes to define economic rationality
in capitalist production.A society, region
or nation is capitalist if the predominant
source of incomes and products being distributed
is capitalist activity, but even so this does
not yet mean necessarily that the capitalist
mode of production is dominant in that society.
== Supply and demand ==
In capitalist economic structures, supply
and demand is an economic model of price determination
in a market. It concludes that in a competitive
market, the unit price for a particular good
will vary until it settles at a point where
the quantity demanded by consumers (at the
current price) will equal the quantity supplied
by producers (at the current price), resulting
in an economic equilibrium for price and quantity.
The four basic laws of supply and demand are:
If demand increases (demand curve shifts to
the right) and supply remains unchanged, then
a shortage occurs, leading to a higher equilibrium
price.
If demand decreases (demand curve shifts to
the left) and supply remains unchanged, then
a surplus occurs, leading to a lower equilibrium
price.
If demand remains unchanged and supply increases
(supply curve shifts to the right), then a
surplus occurs, leading to a lower equilibrium
price.
If demand remains unchanged and supply decreases
(supply curve shifts to the left), then a
shortage occurs, leading to a higher equilibrium
price.
=== Graphical representation of supply and
demand ===
Although it is normal to regard the quantity
demanded and the quantity supplied as functions
of the price of the goods, the standard graphical
representation, usually attributed to Alfred
Marshall, has price on the vertical axis and
quantity on the horizontal axis, the opposite
of the standard convention for the representation
of a mathematical function.
Since determinants of supply and demand other
than the price of the goods in question are
not explicitly represented in the supply-demand
diagram, changes in the values of these variables
are represented by moving the supply and demand
curves (often described as "shifts" in the
curves). By contrast, responses to changes
in the price of the good are represented as
movements along unchanged supply and demand
curves.
==== Supply schedule ====
A supply schedule is a table that shows the
relationship between the price of a good and
the quantity supplied. Under the assumption
of perfect competition, supply is determined
by marginal cost. That is: firms will produce
additional output while the cost of producing
an extra unit of output is less than the price
they would receive.
A hike in the cost of raw goods would decrease
supply and shifting costs up while a discount
would increase supply, shifting costs down
and hurting producers as producer surplus
decreases.
By its very nature, conceptualising a supply
curve requires the firm to be a perfect competitor
(i.e. to have no influence over the market
price). This is true because each point on
the supply curve is the answer to the question
"If this firm is faced with this potential
price, how much output will it be able to
and willing to sell?". If a firm has market
power, its decision of how much output to
provide to the market influences the market
price, therefore the firm is not "faced with"
any price and the question becomes less relevant.
Economists distinguish between the supply
curve of an individual firm and between the
market supply curve. The market supply curve
is obtained by summing the quantities supplied
by all suppliers at each potential price,
thus in the graph of the supply curve individual
firms' supply curves are added horizontally
to obtain the market supply curve.
Economists also distinguish the short-run
market supply curve from the long-run market
supply curve. In this context, two things
are assumed constant by definition of the
short run: the availability of one or more
fixed inputs (typically physical capital)
and the number of firms in the industry. In
the long-run, firms can adjust their holdings
of physical capital, enabling them to better
adjust their quantity supplied at any given
price. Furthermore, in the long-run potential
competitors can enter or exit the industry
in response to market conditions. For both
of these reasons, long-run market supply curves
are generally flatter than their short-run
counterparts.
The determinants of supply are:
Production costs: how much a goods costs to
be produced. Production costs are the cost
of the inputs; primarily labor, capital, energy
and materials. They depend on the technology
used in production and/or technological advances.
See productivity.
Firms' expectations about future prices.
Number of suppliers.
==== Demand schedule ====
A demand schedule, depicted graphically as
the demand curve, represents the amount of
some goods that buyers are willing and able
to purchase at various prices, assuming all
determinants of demand other than the price
of the good in question, such as income, tastes
and preferences, the price of substitute goods
and the price of complementary goods, remain
the same. According to the law of demand,
the demand curve is almost always represented
as downward-sloping, meaning that as price
decreases, consumers will buy more of the
good.Just like the supply curves reflect marginal
cost curves, demand curves are determined
by marginal utility curves. Consumers will
be willing to buy a given quantity of a good
at a given price, if the marginal utility
of additional consumption is equal to the
opportunity cost determined by the price—that
is, the marginal utility of alternative consumption
choices. The demand schedule is defined as
the willingness and ability of a consumer
to purchase a given product in a given frame
of time.
While the aforementioned demand curve is generally
downward-sloping, there may be rare examples
of goods that have upward-sloping demand curves.
Two different hypothetical types of goods
with upward-sloping demand curves are Giffen
goods (an inferior, but staple good) and Veblen
goods (goods made more fashionable by a higher
price).
By its very nature, conceptualising a demand
curve requires that the purchaser be a perfect
competitor—that is, that the purchaser has
no influence over the market price. This is
true because each point on the demand curve
is the answer to the question "If this buyer
is faced with this potential price, how much
of the product will it purchase?". If a buyer
has market power, so its decision of how much
to buy influences the market price, then the
buyer is not "faced with" any price and the
question is meaningless.
Like with supply curves, economists distinguish
between the demand curve of an individual
and the market demand curve. The market demand
curve is obtained by summing the quantities
demanded by all consumers at each potential
price, thus in the graph of the demand curve
individuals' demand curves are added horizontally
to obtain the market demand curve.
The determinants of demand are:
Income.
Tastes and preferences.
Prices of related goods and services.
Consumers' expectations about future prices
and incomes that can be checked.
Number of potential consumers.
=== Equilibrium ===
In the context of supply and demand, economic
equilibrium refers to a state where economic
forces such as supply and demand are balanced
and in the absence of external influences
the (equilibrium) values of economic variables
will not change. For example, in the standard
text-book model of perfect competition equilibrium
occurs at the point at which quantity demanded
and quantity supplied are equal. Market equilibrium
in this case refers to a condition where a
market price is established through competition
such that the amount of goods or services
sought by buyers is equal to the amount of
goods or services produced by sellers. This
price is often called the competitive price
or market clearing price and will tend not
to change unless demand or supply changes
and the quantity is called "competitive quantity"
or market clearing quantity.
=== Partial equilibrium ===
Partial equilibrium, as the name suggests,
takes into consideration only a part of the
market to attain equilibrium.
Jain proposes (attributed to George Stigler):
"A partial equilibrium is one which is based
on only a restricted range of data, a standard
example is price of a single product, the
prices of all other products being held fixed
during the analysis".The supply and demand
model is a partial equilibrium model of economic
equilibrium, where the clearance on the market
of some specific goods is obtained independently
from prices and quantities in other markets.
In other words, the prices of all substitutes
and complements as well as income levels of
consumers are constant. This makes analysis
much simpler than in a general equilibrium
model which includes an entire economy.
Here the dynamic process is that prices adjust
until supply equals demand. It is a powerfully
simple technique that allows one to study
equilibrium, efficiency and comparative statics.
The stringency of the simplifying assumptions
inherent in this approach make the model considerably
more tractable, but it may produce results
which while seemingly precise do not effectively
model real world economic phenomena.
Partial equilibrium analysis examines the
effects of policy action in creating equilibrium
only in that particular sector or market which
is directly affected, ignoring its effect
in any other market or industry assuming that
they being small will have little impact if
any.
Hence this analysis is considered to be useful
in constricted markets.
Léon Walras first formalised the idea of
a one-period economic equilibrium of the general
economic system, but it was French economist
Antoine Augustin Cournot and English political
economist Alfred Marshall who developed tractable
models to analyse an economic system.
=== Empirical estimation ===
Demand and supply relations in a market can
be statistically estimated from price, quantity
and other data with sufficient information
in the model. This can be done with simultaneous-equation
methods of estimation in econometrics. Such
methods allow solving for the model-relevant
"structural coefficients", the estimated algebraic
counterparts of the theory. The parameter
identification problem is a common issue in
"structural estimation". Typically, data on
exogenous variables (that is, variables other
than price and quantity, both of which are
endogenous variables) are needed to perform
such an estimation. An alternative to "structural
estimation" is reduced-form estimation, which
regresses each of the endogenous variables
on the respective exogenous variables.
=== Macroeconomic uses of demand and supply
===
Demand and supply have also been generalised
to explain macroeconomic variables in a market
economy, including the quantity of total output
and the general price level. The Aggregate
Demand–Aggregate Supply model may be the
most direct application of supply and demand
to macroeconomics, but other macroeconomic
models also use supply and demand. Compared
to microeconomic uses of demand and supply,
different (and more controversial) theoretical
considerations apply to such macroeconomic
counterparts as aggregate demand and aggregate
supply. Demand and supply are also used in
macroeconomic theory to relate money supply
and money demand to interest rates and to
relate labor supply and labor demand to wage
rates.
=== History ===
According to Hamid S. Hosseini, the power
of supply and demand was understood to some
extent by several early Muslim scholars, such
as fourteenth-century Mamluk scholar Ibn Taymiyyah,
who wrote: "If desire for goods increases
while its availability decreases, its price
rises. On the other hand, if availability
of the good increases and the desire for it
decreases, the price comes down".
John Locke's 1691 work Some Considerations
on the Consequences of the Lowering of Interest
and the Raising of the Value of Money includes
an early and clear description of supply and
demand and their relationship. In this description,
demand is rent: "The price of any commodity
rises or falls by the proportion of the number
of buyer and sellers" and "that which regulates
the price... [of goods] is nothing else but
their quantity in proportion to their rent".
The phrase "supply and demand" was first used
by James Denham-Steuart in his Inquiry into
the Principles of Political Economy, published
in 1767. Adam Smith used the phrase in his
1776 book The Wealth of Nations, and David
Ricardo titled one chapter of his 1817 work
Principles of Political Economy and Taxation
"On the Influence of Demand and Supply on
Price".In The Wealth of Nations, Smith generally
assumed that the supply price was fixed, but
that its "merit" (value) would decrease as
its "scarcity" increased, in effect what was
later called the law of demand also. In Principles
of Political Economy and Taxation, Ricardo
more rigorously laid down the idea of the
assumptions that were used to build his ideas
of supply and demand. Antoine Augustin Cournot
first developed a mathematical model of supply
and demand in his 1838 Researches into the
Mathematical Principles of Wealth, including
diagrams.
During the late 19th century, the marginalist
school of thought emerged. This field mainly
was started by Stanley Jevons, Carl Menger
and Léon Walras. The key idea was that the
price was set by the most expensive price—that
is, the price at the margin. This was a substantial
change from Adam Smith's thoughts on determining
the supply price.
In his 1870 essay "On the Graphical Representation
of Supply and Demand", Fleeming Jenkin in
the course of "introduc[ing] the diagrammatic
method into the English economic literature"
published the first drawing of supply and
demand curves therein, including comparative
statics from a shift of supply or demand and
application to the labor market. The model
was further developed and popularized by Alfred
Marshall in the 1890 textbook Principles of
Economics.
== Role of government ==
In a capitalist system, the government does
not prohibit private property or prevent individuals
from working where they please. The government
does not prevent firms from determining what
wages they will pay and what prices they will
charge for their products. However, many countries
have minimum wage laws and minimum safety
standards.
Under some versions of capitalism, the government
carries out a number of economic functions,
such as issuing money, supervising public
utilities and enforcing private contracts.
Many countries have competition laws that
prohibit monopolies and cartels from forming.
Despite anti-monopoly laws, large corporations
can form near-monopolies in some industries.
Such firms can temporarily drop prices and
accept losses to prevent competition from
entering the market and then raise them again
once the threat of entry is reduced. In many
countries, public utilities (e.g. electricity,
heating fuel and communications) are able
to operate as a monopoly under government
regulation due to high economies of scale.
Government agencies regulate the standards
of service in many industries, such as airlines
and broadcasting as well as financing a wide
range of programs. In addition, the government
regulates the flow of capital and uses financial
tools such as the interest rate to control
factors such as inflation and unemployment.
=== Relationship to political freedom ===
In his book The Road to Serfdom, Friedrich
Hayek asserts that the economic freedom of
capitalism is a requisite of political freedom.
He argues that the market mechanism is the
only way of deciding what to produce and how
to distribute the items without using coercion.
Milton Friedman, Andrew Brennan and Ronald
Reagan also promoted this view. Friedman claimed
that centralized economic operations are always
accompanied by political repression. In his
view, transactions in a market economy are
voluntary and that the wide diversity that
voluntary activity permits is a fundamental
threat to repressive political leaders and
greatly diminish their power to coerce. Some
of Friedman's views were shared by John Maynard
Keynes, who believed that capitalism is vital
for freedom to survive and thrive. Freedom
House, an American think tank that conducts
international research on and advocates for,
democracy, political freedom and human rights,
has argued "there is a high and statistically
significant correlation between the level
of political freedom as measured by Freedom
House and economic freedom as measured by
the Wall Street Journal/Heritage Foundation
survey".
== Types of capitalism ==
There are many variants of capitalism in existence
that differ according to country and region.
They vary in their institutional makeup and
by their economic policies. The common features
among all the different forms of capitalism
is that they are based on the production of
goods and services for profit, predominantly
market-based allocation of resources and they
are structured upon the accumulation of capital.
The major forms of capitalism are listed hereafter:
=== Advanced capitalism ===
Advanced capitalism is the situation that
pertains to a society in which the capitalist
model has been integrated and developed deeply
and extensively for a prolonged period. Various
writers identify Antonio Gramsci as an influential
early theorist of advanced capitalism, even
if he did not use the term himself. In his
writings, Gramsci sought to explain how capitalism
had adapted to avoid the revolutionary overthrow
that had seemed inevitable in the 19th century.
At the heart of his explanation was the decline
of raw coercion as a tool of class power,
replaced by use of civil society institutions
to manipulate public ideology in the capitalists'
favour.Jürgen Habermas has been a major contributor
to the analysis of advanced-capitalistic societies.
Habermas observed four general features that
characterise advanced capitalism:
Concentration of industrial activity in a
few large firms.
Constant reliance on the state to stabilise
the economic system.
A formally democratic government that legitimises
the activities of the state and dissipates
opposition to the system.
The use of nominal wage increases to pacify
the most restless segments of the work force.
=== Finance capitalism ===
In their critique of capitalism, Marxism and
Leninism both emphasise the role of "finance
capital" as the determining and ruling-class
interest in capitalist society, particularly
in the latter stages.Rudolf Hilferding is
credited with first bringing the term "finance
capitalism" into prominence through Finance
Capital, his 1910 study of the links between
German trusts, banks and monopolies—a study
subsumed by Vladimir Lenin into Imperialism,
the Highest Stage of Capitalism (1917), his
analysis of the imperialist relations of the
great world powers. Lenin concluded that the
banks at that time operated as "the chief
nerve centres of the whole capitalist system
of national economy". For the Comintern (founded
in 1919), the phrase "dictatorship of finance
capitalism" became a regular one.
Fernnand Braudel would later point to two
earlier periods when finance capitalism had
emerged in human history—with the Genoese
in the 16th century and with the Dutch in
the 17th and 18th centuries—although at
those points it developed from commercial
capitalism. Giovanni Arrighi extended Braudel's
analysis to suggest that a predominance of
finance capitalism is a recurring, long-term
phenomenon, whenever a previous phase of commercial/industrial
capitalist expansion reaches a plateau.
=== Mercantilism ===
Mercantilism is a nationalist form of early
capitalism that came into existence approximately
in the late 16th century. It is characterized
by the intertwining of national business interests
to state-interest and imperialism; and consequently,
the state apparatus is utilized to advance
national business interests abroad. An example
of this is colonists living in America who
were only allowed to trade with and purchase
goods from their respective mother countries
(e.g. Britain, Portugal and France). Mercantilism
was driven by the belief that the wealth of
a nation is increased through a positive balance
of trade with other nations—it corresponds
to the phase of capitalist development sometimes
called the primitive accumulation of capital.
=== Free market economy ===
Free market economy refers to a capitalist
economic system where prices for goods and
services are set freely by the forces of supply
and demand and are allowed to reach their
point of equilibrium without intervention
by government policy. It typically entails
support for highly competitive markets and
private ownership of productive enterprises.
Laissez-faire is a more extensive form of
free market economy where the role of the
state is limited to protecting property rights,
or for plumbline anarcho-capitalists, property
rights are protected by private firms and
market-generated law.
=== Social market economy ===
A social market economy is a nominally free
market system where government intervention
in price formation is kept to a minimum, but
the state provides significant services in
the area of social security, unemployment
benefits and recognition of labor rights through
national collective bargaining arrangements.
This model is prominent in Western and Northern
European countries as well as Japan, albeit
in slightly different configurations. The
vast majority of enterprises are privately
owned in this economic model.
Rhine capitalism refers to the contemporary
model of capitalism and adaptation of the
social market model that exists in continental
Western Europe today.
=== State capitalism ===
State capitalism is a capitalist market economy
dominated by state-owned enterprises, where
the state enterprises are organized as commercial,
profit-seeking businesses. The designation
has been used broadly throughout the 20th
century to designate a number of different
economic forms, ranging from state-ownership
in market economies to the command economies
of the former Eastern Bloc. According to Aldo
Musacchio, a professor at Harvard Business
School, state capitalism is a system in which
governments, whether democratic or autocratic,
exercise a widespread influence on the economy
either through direct ownership or various
subsidies. Musacchio notes a number of differences
between today's state capitalism and its predecessors.
In his opinion, gone are the days when governments
appointed bureaucrats to run companies: the
world's largest state-owned enterprises are
now traded on the public markets and kept
in good health by large institutional investors.
Contemporary state capitalism is associated
with the East Asian model of capitalism, dirigisme
and the economy of Norway. Alternatively,
Merriam-Webster defines state capitalism as
"an economic system in which private capitalism
is modified by a varying degree of government
ownership and control".In Socialism: Utopian
and Scientific, Friedrich Engels argued that
state-owned enterprises would characterize
the final stage of capitalism, consisting
of ownership and management of large-scale
production and communication by the bourgeois
state. In his writings, Vladimir Lenin characterized
the economy of Soviet Russia as state capitalist,
believing state capitalism to be an early
step toward the development of socialism.Some
economists and left-wing academics including
Richard D. Wolff and Noam Chomsky argue that
the economies of the former Soviet Union and
Eastern bloc represented a form of state capitalism
because their internal organization within
enterprises and the system of wage labor remained
intact.The term is not used by Austrian School
economists to describe state ownership of
the means of production. The economist Ludwig
von Mises argued that the designation of "state
capitalism" was simply a new label for the
old labels of "state socialism" and "planned
economy" and differed only in non-essentials
from these earlier designations.The debate
between proponents of private versus state
capitalism is centered around questions of
managerial efficacy, productive efficiency
and fair distribution of wealth.
=== Corporate capitalism ===
Corporate capitalism is a free or mixed-market
economy characterized by the dominance of
hierarchical, bureaucratic corporations.
=== Mixed economy ===
A mixed economy is a largely market-based
economy consisting of both private and public
ownership of the means of production and economic
interventionism through macroeconomic policies
intended to correct market failures, reduce
unemployment and keep inflation low. The degree
of intervention in markets varies among different
countries. Some mixed economies, such as France
under dirigisme, also featured a degree of
indirect economic planning over a largely
capitalist-based economy.
Most modern capitalist economies are defined
as "mixed economies" to some degree.
=== Others ===
Other variants of capitalism include:
== Capital accumulation ==
The accumulation of capital is the process
of "making money", or growing an initial sum
of money through investment in production.
Capitalism is based on the accumulation of
capital, whereby financial capital is invested
in order to make a profit and then reinvested
into further production in a continuous process
of accumulation. In Marxian economic theory,
this dynamic is called the law of value. Capital
accumulation forms the basis of capitalism,
where economic activity is structured around
the accumulation of capital, defined as investment
in order to realize a financial profit. In
this context, "capital" is defined as money
or a financial asset invested for the purpose
of making more money (whether in the form
of profit, rent, interest, royalties, capital
gain or some other kind of return).In mainstream
economics, accounting and Marxian economics,
capital accumulation is often equated with
investment of profit income or saving, especially
in real capital goods. The concentration and
centralisation of capital are two of the results
of such accumulation. In modern macroeconomics
and econometrics, the phrase "capital formation"
is often used in preference to "accumulation",
though the United Nations Conference on Trade
and Development (UNCTAD) refers nowadays to
"accumulation". The term “accumulation”
is occasionally used in national accounts.
=== Background ===
Accumulation can be measured as the monetary
value of investments, the amount of income
that is reinvested, or as the change in the
value of assets owned (the increase in the
value of the capital stock). Using company
balance sheets, tax data and direct surveys
as a basis, government statisticians estimate
total investments and assets for the purpose
of national accounts, national balance of
payments and flow of funds statistics. The
Reserve Banks and the Treasury usually provide
interpretations and analysis of this data.
Standard indicators include capital formation,
gross fixed capital formation, fixed capital,
household asset wealth and foreign direct
investment.
Organisations such as the International Monetary
Fund, the UNCTAD, the World Bank Group, the
OECD and the Bank for International Settlements
used national investment data to estimate
world trends. The Bureau of Economic Analysis,
Eurostat and the Japan Statistical Office
provide data on the United States, Europe
and Japan respectively. Other useful sources
of investment information are business magazines
such as Fortune, Forbes, The Economist, Business
Week and so on as well as various corporate
"watchdog" organisations and non-governmental
organisation publications. A reputable scientific
journal is the Review of Income & Wealth.
In the case of the United States, the "Analytical
Perspectives" document (an annex to the yearly
budget) provides useful wealth and capital
estimates applying to the whole country.
In Karl Marx' economic theory, capital accumulation
refers to the operation whereby profits are
reinvested increasing the total quantity of
capital. Capital is viewed by Marx as expanding
value, that is, in other terms, as a sum of
capital, usually expressed in money, that
is transformed through human labor into a
larger value, extracted as profits and expressed
as money. Here, capital is defined essentially
as economic or commercial asset value in search
of additional value or surplus-value. This
requires property relations which enable objects
of value to be appropriated and owned, and
trading rights to be established. Capital
accumulation has a double origin, namely in
trade and in expropriation, both of a legal
or illegal kind. The reason is that a stock
of capital can be increased through a process
of exchange or "trading up", but also through
directly taking an asset or resource from
someone else without compensation. David Harvey
calls this accumulation by dispossession.
The continuation and progress of capital accumulation
depends on the removal of obstacles to the
expansion of trade and this has historically
often been a violent process. As markets expand,
more and more new opportunities develop for
accumulating capital because more and more
types of goods and services can be traded
in. However, capital accumulation may also
confront resistance when people refuse to
sell, or refuse to buy (for example a strike
by investors or workers, or consumer resistance).
=== Concentration and centralisation ===
According to Marx, capital has the tendency
for concentration and centralization in the
hands of the wealthy. Marx explains: "It is
concentration of capitals already formed,
destruction of their individual independence,
expropriation of capitalist by capitalist,
transformation of many small into few large
capitals. [...] Capital grows in one place
to a huge mass in a single hand, because it
has in another place been lost by many. [...] The
battle of competition is fought by cheapening
of commodities. The cheapness of commodities
demands, caeteris paribus, on the productiveness
of labour, and this again on the scale of
production. Therefore, the larger capitals
beat the smaller. It will further be remembered
that, with the development of the capitalist
mode of production, there is an increase in
the minimum amount of individual capital necessary
to carry on a business under its normal conditions.
The smaller capitals, therefore, crowd into
spheres of production which Modern Industry
has only sporadically or incompletely got
hold of. Here competition rages [...] It always
ends in the ruin of many small capitalists,
whose capitals partly pass into the hands
of their conquerors, partly vanish".
=== The rate of accumulation ===
In Marxian economics, the rate of accumulation
is defined as (1) the value of the real net
increase in the stock of capital in an accounting
period; and (2) the proportion of realised
surplus-value or profit-income which is reinvested,
rather than consumed. This rate can be expressed
by means of various ratios between the original
capital outlay, the realised turnover, surplus-value
or profit and reinvestments (e.g. the writings
of the economist Michał Kalecki).
Other things being equal, the greater the
amount of profit-income that is disbursed
as personal earnings and used for consumptive
purposes, the lower the savings rate and the
lower the rate of accumulation is likely to
be. However, earnings spent on consumption
can also stimulate market demand and higher
investment. This is the cause of endless controversies
in economic theory about "how much to spend,
and how much to save".
In a boom period of capitalism, the growth
of investments is cumulative, i.e. one investment
leads to another, leading to a constantly
expanding market, an expanding labor force
and an increase in the standard of living
for the majority of the people.In a stagnating,
decadent capitalism, the accumulation process
is increasingly oriented towards investment
on military and security forces, real estate,
financial speculation and luxury consumption.
In that case, income from value-adding production
will decline in favour of interest, rent and
tax income, with as a corollary an increase
in the level of permanent unemployment. The
more capital one owns, the more capital one
can also borrow. The inverse is also true
and this is one factor in the widening gap
between the rich and the poor.Ernest Mandel
emphasised that the rhythm of capital accumulation
and growth depended critically on (1) the
division of a society's social product between
"necessary product" and "surplus product";
and (2) the division of the surplus product
between investment and consumption. In turn,
this allocation pattern reflected the outcome
of competition among capitalists, competition
between capitalists and workers and competition
between workers. The pattern of capital accumulation
can therefore never be simply explained by
commercial factors as it also involved social
factors and power relationships.
=== The circuit of capital accumulation from
production ===
Strictly speaking, capital has accumulated
only when realised profit income has been
reinvested in capital assets. As suggested
in the first volume of Marx' Das Kapital,
the process of capital accumulation in production
has at least seven distinct but linked moments:
The initial investment of capital (which could
be borrowed capital) in means of production
and labor power.
The command over surplus-labour and its appropriation.
The valorisation (increase in value) of capital
through production of new outputs.
The appropriation of the new output produced
by employees, containing the added value.
The realisation of surplus-value through output
sales.
The appropriation of realised surplus-value
as (profit) income after deduction of costs.
The reinvestment of profit income in production.All
of these moments do not refer simply to an
"economic" or commercial process. Rather,
they assume the existence of legal, social,
cultural and economic power conditions, without
which creation, distribution and circulation
of the new wealth could not occur. This becomes
especially clear when the attempt is made
to create a market where none exists, or where
people refuse to trade.
=== Simple and expanded reproduction ===
In the second volume of Das Kapital, Marx
continues the story and shows that with the
aid of bank credit capital in search of growth
can more or less smoothly mutate from one
form to another, alternately taking the form
of money capital (liquid deposits, securities
and so on), commodity capital (tradable products,
real estate and the like), or production capital
(means of production and labor power).
His discussion of the simple and expanded
reproduction of the conditions of production
offers a more sophisticated model of the parameters
of the accumulation process as a whole. At
simple reproduction, a sufficient amount is
produced to sustain society at the given living
standard; the stock of capital stays constant.
At expanded reproduction, more product-value
is produced than is necessary to sustain society
at a given living standard (a surplus product);
the additional product-value is available
for investments which enlarge the scale and
variety of production.
The bourgeois claim there is no economic law
according to which capital is necessarily
re-invested in the expansion of production,
that such depends on anticipated profitability,
market expectations and perceptions of investment
risk. Such statements only explain the subjective
experiences of investors and ignore the objective
realities which would influence such opinions.
As Marx states in the second volume of Das
Kapital, simple reproduction only exists if
the variable and surplus capital realised
by Dept. 1—producers of means of production—exactly
equals that of the constant capital of Dept.
2, producers of articles of consumption (p.
524). Such equilibrium rests on various assumptions,
such as a constant labor supply (no population
growth). Accumulation does not imply a necessary
change in total magnitude of value produced,
but can simply refer to a change in the composition
of an industry (p. 514).
Ernest Mandel introduced the additional concept
of contracted economic reproduction, i.e.
reduced accumulation where business operating
at a loss outnumbers growing business, or
economic reproduction on a decreasing scale,
for example due to wars, natural disasters
or devalorisation.
Balanced economic growth requires that different
factors in the accumulation process expand
in appropriate proportions. However, markets
themselves cannot spontaneously create that
balance and in fact what drives business activity
is precisely the imbalances between supply
and demand: inequality is the motor of growth.
This partly explains why the worldwide pattern
of economic growth is very uneven and unequal,
even although markets have existed almost
everywhere for a very long-time. Some people
argue that it also explains government regulation
of market trade and protectionism.
=== Capital accumulation as social relation
===
"Accumulation of capital" sometimes also refers
in Marxist writings to the reproduction of
capitalist social relations (institutions)
on a larger scale over time, i.e. the expansion
of the size of the proletariat and of the
wealth owned by the bourgeoisie.
This interpretation emphasises that capital
ownership, predicated on command over labor,
is a social relation: the growth of capital
implies the growth of the working class (a
"law of accumulation"). In the first volume
of Das Kapital, Marx had illustrated this
idea with reference to Edward Gibbon Wakefield's
theory of colonisation: Wakefield discovered
that in the Colonies, property in money, means
of subsistence, machines, and other means
of production, does not as yet stamp a man
as a capitalist if there be wanting the correlative—the
wage-worker, the other man who is compelled
to sell himself of his own free-will. He discovered
that capital is not a thing, but a social
relation between persons, established by the
instrumentality of things. Mr. Peel, he moans,
took with him from England to Swan River,
West Australia, means of subsistence and of
production to the amount of £50,000. Mr.
Peel had the foresight to bring with him,
besides, 3,000 persons of the working-class,
men, women, and children. Once arrived at
his destination, 'Mr. Peel was left without
a servant to make his bed or fetch him water
from the river.' Unhappy Mr. Peel, who provided
for everything except the export of English
modes of production to Swan River!
In the third volume of Das Kapital, Marx refers
to the "fetishism of capital" reaching its
highest point with interest-bearing capital
because now capital seems to grow of its own
accord without anybody doing anything: The
relations of capital assume their most externalised
and most fetish-like form in interest-bearing
capital. We have here
M
−
M
′
{\displaystyle M-M'}
, money creating more money, self-expanding
value, without the process that effectuates
these two extremes. In merchant's capital,
M
−
C
−
M
′
{\displaystyle M-C-M'}
, there is at least the general form of the
capitalistic movement, although it confines
itself solely to the sphere of circulation,
so that profit appears merely as profit derived
from alienation; but it is at least seen to
be the product of a social relation, not the
product of a mere thing. [...] This is obliterated
in
M
−
M
′
{\displaystyle M-M'}
, the form of interest-bearing capital. [...] The
thing (money, commodity, value) is now capital
even as a mere thing, and capital appears
as a mere thing. The result of the entire
process of reproduction appears as a property
inherent in the thing itself. It depends on
the owner of the money, i.e., of the commodity
in its continually exchangeable form, whether
he wants to spend it as money or loan it out
as capital. In interest-bearing capital, therefore,
this automatic fetish, self-expanding value,
money generating money, are brought out in
their pure state and in this form it no longer
bears the birth-marks of its origin. The social
relation is consummated in the relation of
a thing, of money, to itself. Instead of the
actual transformation of money into capital,
we see here only form without content.
== Wage labour ==
Wage labour refers to the sale of labour under
a formal or informal employment contract to
an employer. These transactions usually occur
in a labour market where wages are market
determined. Individuals who possess and supply
financial capital or labor to productive ventures
often become owners, either jointly (as shareholders)
or individually. In Marxist economics, these
owners of the means of production and suppliers
of capital are generally called capitalists.
The description of the role of the capitalist
has shifted, first referring to a useless
intermediary between producers to an employer
of producers and eventually came to refer
to owners of the means of production. Labor
includes all physical and mental human resources,
including entrepreneurial capacity and management
skills, which are needed to produce products
and services. Production is the act of making
goods or services by applying labor power.Critics
of the capitalist mode of production see wage
labour as a major, if not defining, aspect
of hierarchical industrial systems. Most opponents
of the institution support worker self-management
and economic democracy as alternatives to
both wage labour and to capitalism. While
most opponents of the wage system blame the
capitalist owners of the means of production
for its existence, most anarchists and other
libertarian socialists also hold the state
as equally responsible as it exists as a tool
utilised by capitalists to subsidise themselves
and protect the institution of private ownership
of the means of production. As some opponents
of wage labour take influence from Marxist
propositions, many are opposed to private
property, but maintain respect for personal
property.
=== Types ===
The most common form of wage labour currently
is ordinary direct, or "full-time", employment
in which a free worker sells his or her labour
for an indeterminate time (from a few years
to the entire career of the worker) in return
for a money-wage or salary and a continuing
relationship with the employer which it does
not in general offer contractors or other
irregular staff. However, wage labour takes
many other forms and explicit as opposed to
implicit (i.e. conditioned by local labour
and tax law) contracts are not uncommon. Economic
history shows a great variety of ways in which
labour is traded and exchanged. The differences
show up in the form of:
Employment status: a worker could be employed
full-time, part-time, or on a casual basis.
He or she could be employed for example temporarily
for a specific project only, or on a permanent
basis. Part-time wage labour could combine
with part-time self-employment. The worker
could be employed also as an apprentice.
Civil (legal) status: the worker could for
example be a free citizen, an indentured labourer,
the subject of forced labour (including some
prison or army labour); a worker could be
assigned by the political authorities to a
task, they could be a semi-slave or a serf
bound to the land who is hired out part of
the time. So the labour might be performed
on a more or less voluntary basis, or on a
more or less involuntary basis, in which there
are many gradations.
Method of payment (remuneration or compensation):
the work done could be paid "in cash" (a money-wage)
or "in kind" (through receiving goods and/or
services), or in the form of "piece rates"
where the wage is directly dependent on how
much the worker produces. In some cases, the
worker might be paid in the form of credit
used to buy goods and services, or in the
form of stock options or shares in an enterprise.
Method of hiring: the worker might engage
in a labour-contract on his or her own initiative,
or he or she might hire out their labour as
part of a group. However, he or she may also
hire out their labour via an intermediary
(such as an employment agency) to a third
party. In this case, he or she is paid by
the intermediary, but works for a third party
which pays the intermediary. In some cases,
labour is subcontracted several times, with
several intermediaries. Another possibility
is that the worker is assigned or posted to
a job by a political authority, or that an
agency hires out a worker to an enterprise
together with the means of production.
== Effects of war ==
War typically causes the diversion, destruction
and creation of capital assets as capital
assets are both destroyed or consumed and
diverted to types of production needed to
fight the war. Many assets are wasted and
in some few cases created specifically to
fight a war. War driven demands may be a powerful
stimulus for the accumulation of capital and
production capability in limited areas and
market expansion outside the immediate theatre
of war. Often this has induced laws against
perceived and real war profiteering.
The total hours worked in the United States
rose by 34 percent during World War II, even
though the military draft reduced the civilian
labor force by 11 percent.War destruction
can be illustrated by looking at World War
II. Industrial war damage was heaviest in
Japan, where 1/4 of factory buildings and
1/3 of plant and equipment were destroyed;
1/7 of electric power-generating capacity
was destroyed and 6/7 of oil refining capacity.
The Japanese merchant fleet lost 80% of their
ships. In Germany in 1944, when air attacks
were heaviest, 6.5% of machine tools were
damaged or destroyed, but around 90% were
later repaired. About 10% of steel production
capacity was lost. In Europe, the United States
and the Soviet Union enormous resources were
accumulated and ultimately dissipated as planes,
ships, tanks and so on were built and then
lost or destroyed.
Germany's total war damage was estimated at
about 17.5% of the pre-war total capital stock
by value, i.e. about 1/6. In the Berlin area
alone, there were 8 million refugees lacking
basic necessities. In 1945, less than 10%
of the railways were still operating. 2,395
rail bridges were destroyed and a total of
7,500 bridges, 10,000 locomotives and more
than 100,000 goods wagons were destroyed.
Less than 40% of the remaining locomotives
were operational.
However, by the first quarter of 1946 European
rail traffic, which was given assistance and
preferences (by Western appointed military
governors) for resources and material as an
essential asset, regained its prewar operational
level. At the end of the year, 90% of Germany's
railway lines were operating again. In retrospect,
the rapidity of infrastructure reconstruction
appears astonishing.
Initially, in May 1945 newly installed United
States president Harry S. Truman's directive
had been that no steps would be taken towards
economic rehabilitation of Germany. In fact,
the initial industry plan of 1946 prohibited
production in excess of half of the 1938 level;
the iron and steel industry was allowed to
produce only less than a third of pre-war
output. These plans were rapidly revised and
better plans were instituted. In 1946, over
10% of Germany's physical capital stock (plant
and equipment) was also dismantled and confiscated,
most of it going to the Soviet Union. By 1947,
industrial production in Germany was at 1/3
of the 1938 level and industrial investment
at about 1/2 the 1938 level.
The first big strike-wave in the Ruhr occurred
in early 1947—it was about food rations
and housing, but soon there were demands for
nationalisation. However, the United States
appointed military governor (Newman) stated
at the time that he had the power to break
strikes by withholding food rations. The clear
message was "no work, no eat". As the military
controls in Western Germany were nearly all
relinquished and the Germans were allowed
to rebuild their own economy with Marshall
Plan aid things rapidly improved. By 1951,
German industrial production had overtaken
the prewar level. The Marshall Aid funds were
important, but after the currency reform (which
permitted German capitalists to revalue their
assets) and the establishment of a new political
system much more important was the commitment
of the United States to rebuilding German
capitalism and establishing a free market
economy and government, rather than keeping
Germany in a weak position. Initially, average
real wages remained low, lower even than in
1938, until the early 1950s while profitability
was unusually high. So the total investment
fund, aided by credits, was also high, resulting
in a high rate of capital accumulation which
was nearly all reinvested in new construction
or new tools. This was called the German economic
miracle or Wirtschaftswunder.In Italy, the
victorious Allies did three things in 1945:
they imposed their absolute military authority;
they quickly disarmed the Italian partisans
from a very large stock of weapons; and they
agreed to a state guarantee of wage payments
as well as a veto on all sackings of workers
from their jobs. Although the Italian Communist
Party grew very large immediately after the
war ended—it achieved a membership of 1.7
million people in a population of 45 million—it
was outmaneuvered through a complicated political
battle by the Christian Democrats after three
years. In the 1950s, an economic boom began
in Italy, at first fueled by internal demand
and then also by exports.In modern times,
it has often been possible to rebuild physical
capital assets destroyed in wars completely
within the space of about 10 years, except
in cases of severe pollution by chemical warfare
or other kinds of irreparable devastation.
However, damage to human capital has been
much more devastating in terms of fatalities
(in the case of World War II, about 55 million
deaths), permanent physical disability, enduring
ethnic hostility and psychological injuries
which have effects for at least several generations.
== Criticism ==
Critics of capitalism associate the economic
system with social inequality; unfair distribution
of wealth and power; materialism; repression
of workers and trade unionists; social alienation;
economic inequality; unemployment; and economic
instability. Many socialists consider capitalism
to be irrational in that production and the
direction of the economy are unplanned, creating
many inconsistencies and internal contradictions.
Capitalism and individual property rights
have been associated with the tragedy of the
anticommons where owners are unable to agree.
Marxian economist Richard D. Wolff postulates
that capitalist economies prioritize profits
and capital accumulation over the social needs
of communities and capitalist enterprises
rarely include the workers in the basic decisions
of the enterprise. Democratic socialists argue
that the role of the state in a capitalist
society is to defend the interests of the
bourgeoisie. These states take actions to
implement such things as unified national
markets, national currencies and customs system.
Capitalism and capitalist governments have
also been criticized as oligarchic in nature
due to the inevitable inequality characteristic
of economic progress.Some labor historians
and scholars have argued that unfree labor—by
slaves, indentured servants, prisoners or
other coerced persons—is compatible with
capitalist relations. Tom Brass argued that
unfree labor is acceptable to capital. Historian
Greg Grandin argues that capitalism has its
origins in slavery, saying that "[w]hen historians
talk about the Atlantic market revolution,
they are talking about capitalism. And when
they are talking about capitalism, they are
talking about slavery." Some historians, including
Edward E. Baptist and Sven Beckert, assert
that slavery was an integral component in
the violent development of American and global
capitalism. The Slovenian continental philosopher
Slavoj Žižek posits that the new era of
global capitalism has ushered in new forms
of contemporary slavery, including migrant
workers deprived of basic civil rights on
the Arabian Peninsula, the total control of
workers in Asian sweatshops, and the use of
forced labor in the exploitation of natural
resources in Central Africa.According to Immanuel
Wallerstein, institutional racism has been
"one of the most significant pillars" of the
capitalist system and serves as "the ideological
justification for the hierarchization of the
work-force and its highly unequal distributions
of reward".Many aspects of capitalism have
come under attack from the anti-globalization
movement, which is primarily opposed to corporate
capitalism. Environmentalists have argued
that capitalism requires continual economic
growth and that it will inevitably deplete
the finite natural resources of Earth and
cause mass extinctions of animal and plant
life. Such critics argue that while neoliberalism,
the ideological backbone of contemporary globalized
capitalism, has indeed increased global trade,
it has also destroyed traditional ways of
life, exacerbated inequality and increased
global poverty—with more living today in
abject poverty than before neoliberalism and
that environmental indicators indicate massive
environmental degradation since the late 1970s.Some
scholars blame the financial crisis of 2007–2008
on the neoliberal capitalist model. Following
the banking crisis of 2007, Alan Greenspan
told the United States Congress on 23 October
2008 that "[t]his modern risk-management paradigm
held sway for decades. The whole intellectual
edifice, however, collapsed in the summer
of last year", and that "I made a mistake
in presuming that the self-interests of organizations,
specifically banks and others, were such that
they were best capable of protecting their
own shareholders and their equity in firms
[...] I was shocked".Many religions have criticized
or opposed specific elements of capitalism.
Traditional Judaism, Christianity, and Islam
forbid lending money at interest, although
alternative methods of banking have been developed.
Some Christians have criticized capitalism
for its materialist aspects and its inability
to account for the wellbeing of all people.
Many of Jesus' parables deal with economic
concerns: farming, shepherding, being in debt,
doing hard labor, being excluded from banquets
and the houses of the rich and have implications
for wealth and power distribution. Catholic
scholars and clergy have often criticized
capitalism because of its disenfranchisement
of the poor, often promoting distributism
as an alternative. In his 84-page apostolic
exhortation Evangelii gaudium, Catholic Pope
Francis described unfettered capitalism as
"a new tyranny" and called on world leaders
to fight rising poverty and inequality:
Some people continue to defend trickle-down
theories which assume that economic growth,
encouraged by a free market, will inevitably
succeed in bringing about greater justice
and inclusiveness in the world. This opinion,
which has never been confirmed by the facts,
expresses a crude and naive trust in the goodness
of those wielding economic power and in the
sacralized workings of the prevailing economic
system. Meanwhile, the excluded are still
waiting.
Proponents of capitalism argue that it creates
more prosperity than any other economic system
and that its benefits are mainly to the ordinary
person. Critics of capitalism variously associate
it with economic instability, an inability
to provide for the well-being of all people
and an unsustainable danger to the natural
environment. Socialists maintain that although
capitalism is superior to all previously existing
economic systems (such as feudalism or slavery),
the contradiction between class interests
will only be resolved by advancing into a
completely new social system of production
and distribution in which all persons have
an equal relationship to the means of production.The
term capitalism in its modern sense is often
attributed to Karl Marx. In his Das Kapital,
Marx analyzed the "capitalist mode of production"
using a method of understanding today known
as Marxism. However, Marx himself rarely used
the term "capitalism" while it was used twice
in the more political interpretations of his
work, primarily authored by his collaborator
Friedrich Engels. In the 20th century, defenders
of the capitalist system often replaced the
term capitalism with phrases such as free
enterprise and private enterprise and replaced
capitalist with rentier and investor in reaction
to the negative connotations associated with
capitalism.
=== The profit motive ===
The majority of criticisms against the profit
motive centre on the idea that the profit
motive encourages selfishness and greed, rather
than serve the public good or necessarily
creating an increase in net wealth. Critics
of the profit motive contend that companies
disregard morals or public safety in the pursuit
of profits.Free market economists counter
that the profit motive, coupled with competition,
actually reduces the final price of an item
for consumption, rather than raising it. They
argue that businesses profit by selling a
good at a lower price and at a greater volume
than the competition. Economist Thomas Sowell
uses supermarkets as an example to illustrate
this point: "It has been estimated that a
supermarket makes a clear profit of about
a penny on a dollar of sales. If that sounds
pretty skimpy, remember that it is collecting
that penny on every dollar at several cash
registers simultaneously and, in many cases,
around the clock".American economist Milton
Friedman has argued that greed and self-interest
are universal human traits. On a 1979 episode
of The Phil Donahue Show, Friedman states:
"The world runs on individuals pursuing their
separate interests". He continues by explaining
that only in capitalist countries, where individuals
can pursue their own self-interest, people
have been able to escape from "grinding poverty".
=== Comparison to slavery ===
Wage labor has long been compared to slavery.
As a result, the phrase "wage slavery" is
often utilized as a pejorative for wage labor.
Similarly, advocates of slavery looked upon
the "comparative evils of Slave Society and
of Free Society, of slavery to human Masters
and slavery to Capital" and proceeded to argue
that wage slavery was actually worse than
chattel slavery. Slavery apologists like George
Fitzhugh contended that workers only accepted
wage labor with the passage of time as they
became "familiarised and inattentive to the
infected social atmosphere they continually
inhale". Scholars have debated the exact relationship
between wage labor, slavery, and capitalism
at length, especially for the Antebellum South.Similarities
between wage labor and slavery were noted
as early as Cicero in Ancient Rome, such as
in De Officiis. With the advent of the Industrial
Revolution, thinkers such as Pierre-Joseph
Proudhon and Karl Marx elaborated the comparison
between wage labor and slavery in the context
of a critique of societal property not intended
for active personal use while Luddites emphasized
the dehumanisation brought about by machines.
Before the American Civil War, Southern defenders
of African American slavery invoked the concept
of wage slavery to favorably compare the condition
of their slaves to workers in the North. The
United States abolished slavery during the
Civil War, but labor union activists found
the metaphor useful. According to Lawrence
Glickman, in the Gilded Age "references abounded
in the labor press, and it is hard to find
a speech by a labour leader without the phrase".
According to Noam Chomsky, analysis of the
psychological implications of wage slavery
goes back to the Enlightenment era. In his
1791 book On the Limits of State Action, liberal
thinker Wilhelm von Humboldt explained how
"whatever does not spring from a man's free
choice, or is only the result of instruction
and guidance, does not enter into his very
nature; he does not perform it with truly
human energies, but merely with mechanical
exactness" and so when the laborer works under
external control, "we may admire what he does,
but we despise what he is". Both the Milgram
and Stanford experiments have been found useful
in the psychological study of wage-based workplace
relations. Additionally, as per anthropologist
David Graeber, the earliest wage labor contracts
we know about were in fact contracts for the
rental of chattel slaves (usually the owner
would receive a share of the money and the
slave another, with which to maintain his
or her living expenses). According to Graeber,
such arrangements were quite common in New
World slavery as well, whether in the United
States or Brazil. C. L. R. James argued in
The Black Jacobins that most of the techniques
of human organisation employed on factory
workers during the Industrial Revolution were
first developed on slave plantations.
Some anti-capitalist thinkers claim that the
elite maintain wage slavery and a divided
working class through their influence over
the media and entertainment industry, educational
institutions, unjust laws, nationalist and
corporate propaganda, pressures and incentives
to internalize values serviceable to the power
structure, state violence, fear of unemployment
and a historical legacy of exploitation and
profit accumulation/transfer under prior systems,
which shaped the development of economic theory:
Adam Smith noted that employers often conspire
together to keep wages low: The interest of
the dealers... in any particular branch of
trade or manufactures, is always in some respects
different from, and even opposite to, that
of the public… [They] have generally an
interest to deceive and even to oppress the
public… We rarely hear, it has been said,
of the combinations of masters, though frequently
of those of workmen. But whoever imagines,
upon this account, that masters rarely combine,
is as ignorant of the world as of the subject.
Masters are always and everywhere in a sort
of tacit, but constant and uniform combination,
not to raise the wages of labor above their
actual rate… It is not, however, difficult
to foresee which of the two parties must,
upon all ordinary occasions, have the advantage
in the dispute, and force the other into a
compliance with their terms.
Aristotle made the statement that "the citizens
must not live a mechanic or a mercantile life
(for such a life is ignoble and inimical to
virtue), nor yet must those who are to be
citizens in the best state be tillers of the
soil (for leisure is needed both for the development
of virtue and for active participation in
politics)", often paraphrased as "all paid
jobs absorb and degrade the mind". Cicero
wrote in 44 BC that "vulgar are the means
of livelihood of all hired workmen whom we
pay for mere manual labour, not for artistic
skill; for in their case the very wage they
receive is a pledge of their slavery". Somewhat
similar criticisms have also been expressed
by some proponents of liberalism, like Henry
George, Silvio Gesell and Thomas Paine as
well as the Distributist school of thought
within the Roman Catholic Church.
To Marxist and anarchist thinkers like Mikhail
Bakunin and Peter Kropotkin, wage slavery
was a class condition in place due to the
existence of private property and the state.
This class situation rested primarily on:
The existence of property not intended for
active use.
The concentration of ownership in few hands.
The lack of direct access by workers to the
means of production and consumption goods.
The perpetuation of a reserve army of unemployed
workers.For Marxists, labor as commodity,
which is how they regard wage labor, provides
a fundamental point of attack against capitalism.
"It can be persuasively argued", noted one
concerned philosopher, "that the conception
of the worker's labour as a commodity confirms
Marx's stigmatization of the wage system of
private capitalism as 'wage-slavery;' that
is, as an instrument of the capitalist's for
reducing the worker's condition to that of
a slave, if not below it". That this objection
is fundamental follows immediately from Marx's
conclusion that wage labor is the very foundation
of capitalism: "Without a class dependent
on wages, the moment individuals confront
each other as free persons, there can be no
production of surplus value; without the production
of surplus-value there can be no capitalist
production, and hence no capital and no capitalist!".
=== Marxian responses ===
Marx considered capitalism to be a historically
specific mode of production (the way in which
the productive property is owned and controlled,
combined with the corresponding social relations
between individuals based on their connection
with the process of production).The "capitalistic
era" according to Karl Marx dates from 16th-century
merchants and small urban workshops. Marx
knew that wage labour existed on a modest
scale for centuries before capitalist industry.
For Marx, the capitalist stage of development
or "bourgeois society" represented the most
advanced form of social organization to date,
but he also thought that the working classes
would come to power in a worldwide socialist
or communist transformation of human society
as the end of the series of first aristocratic,
then capitalist and finally working class
rule was reached.Following Adam Smith, Marx
distinguished the use value of commodities
from their exchange value in the market. According
to Marx, capital is created with the purchase
of commodities for the purpose of creating
new commodities with an exchange value higher
than the sum of the original purchases. For
Marx, the use of labor power had itself become
a commodity under capitalism and the exchange
value of labor power, as reflected in the
wage, is less than the value it produces for
the capitalist.
This difference in values, he argues, constitutes
surplus value, which the capitalists extract
and accumulate. In his book Capital, Marx
argues that the capitalist mode of production
is distinguished by how the owners of capital
extract this surplus from workers—all prior
class societies had extracted surplus labor,
but capitalism was new in doing so via the
sale-value of produced commodities. He argues
that a core requirement of a capitalist society
is that a large portion of the population
must not possess sources of self-sustenance
that would allow them to be independent and
are instead forced to sell their labor for
a wage.In conjunction with his criticism of
capitalism was Marx's belief that the working
class, due to its relationship to the means
of production and numerical superiority under
capitalism, would be the driving force behind
the socialist revolution. This argument is
intertwined with Marx' version of the labor
theory of value arguing that labor is the
source of all value and thus of profit.
In Imperialism, the Highest Stage of Capitalism
(1916), Vladimir Lenin further developed Marxist
theory and argued that capitalism necessarily
led to monopoly capitalism and the export
of capital—which he also called "imperialism"—to
find new markets and resources, representing
the last and highest stage of capitalism.
Some 20th century Marxian economists consider
capitalism to be a social formation where
capitalist class processes dominate, but are
not exclusive.To these thinkers, capitalist
class processes are simply those in which
surplus labor takes the form of surplus value,
usable as capital; other tendencies for utilization
of labor nonetheless exist simultaneously
in existing societies where capitalist processes
predominate. However, other late Marxian thinkers
argue that a social formation as a whole may
be classed as capitalist if capitalism is
the mode by which a surplus is extracted,
even if this surplus is not produced by capitalist
activity as when an absolute majority of the
population is engaged in non-capitalist economic
activity.In Limits to Capital (1982), David
Harvey outlines an overdetermined, "spatially
restless" capitalism coupled with the spatiality
of crisis formation and resolution. Harvey
used Marx's theory of crisis to aid his argument
that capitalism must have its "fixes", but
that we cannot predetermine what fixes will
be implemented, nor in what form they will
be. His work on contractions of capital accumulation
and international movements of capitalist
modes of production and money flows has been
influential. According to Harvey, capitalism
creates the conditions for volatile and geographically
uneven development Sociologists such as Ulrich
Beck envisioned the society of risk as a new
cultural value which saw risk as a commodity
to be exchanged in globalized economies. This
theory suggested that disasters and capitalist
economy were inevitably entwined. Disasters
allow the introduction of economic programs
which otherwise would be rejected as well
as decentralizing the class structure in production.
=== Criticisms on the environmental sustainability
of capitalism ===
Scholars argue that the capitalist approach
to environmental economics does not take into
consideration the preserving of natural resources.
Capitalism creates three ecological problems:
growth, technology, and consumption. The growth
problem results from the nature of capitalism,
as it focuses around the accumulation of Capital.
The innovation of new technologies has an
impact on the environmental future as they
serve as a capitalist tool in which environmental
technologies can result in the expansion of
the system. Consumption is focused around
the capital accumulation of commodities and
neglects the use-value of production.
=== Supply and demand ===
At least two assumptions are necessary for
the validity of the standard model: first,
that supply and demand are independent; and
second, that supply is "constrained by a fixed
resource". If these conditions do not hold,
then the Marshallian model cannot be sustained.
Sraffa's critique focused on the inconsistency
(except in implausible circumstances) of partial
equilibrium analysis and the rationale for
the upward slope of the supply curve in a
market for a produced consumption good. The
notability of Sraffa's critique is also demonstrated
by Paul A. Samuelson's comments and engagements
with it over many years, for example:
What a cleaned-up version of Sraffa (1926)
establishes is how nearly empty are all of
Marshall's partial equilibrium boxes. To a
logical purist of Wittgenstein and Sraffa
class, the Marshallian partial equilibrium
box of constant cost is even more empty than
the box of increasing cost.Aggregate excess
demand in a market is the difference between
the quantity demanded and the quantity supplied
as a function of price. In the model with
an upward-sloping supply curve and downward-sloping
demand curve, the aggregate excess demand
function only intersects the axis at one point,
namely at the point where the supply and demand
curves intersect. The Sonnenschein–Mantel–Debreu
theorem shows that the standard model cannot
be rigorously derived in general from general
equilibrium theory.The model of prices being
determined by supply and demand assumes perfect
competition. However, "economists have no
adequate model of how individuals and firms
adjust prices in a competitive model. If all
participants are price-takers by definition,
then the actor who adjusts prices to eliminate
excess demand is not specified". Goodwin,
Nelson, Ackerman and Weisskopf write:
If we mistakenly confuse precision with accuracy,
then we might be misled into thinking that
an explanation expressed in precise mathematical
or graphical terms is somehow more rigorous
or useful than one that takes into account
particulars of history, institutions or business
strategy. This is not the case. Therefore,
it is important not to put too much confidence
in the apparent precision of supply and demand
graphs. Supply and demand analysis is a useful
precisely formulated conceptual tool that
clever people have devised to help us gain
an abstract understanding of a complex world.
It does not—nor should it be expected to—give
us in addition an accurate and complete description
of any particular real world market.
=== Externalities ===
Market failure occurs when an externality
is present and a market will often either
under-produce a product with a positive externalisation
or overproduce a product that generates a
negative externalisation. Air pollution, for
instance, is a negative externalisation that
cannot be easily incorporated into markets
as the world's air is not owned and then sold
for use to polluters. So too much pollution
could be emitted and people not involved in
the production pay the cost of the pollution
instead of the firm that initially emitted
the air pollution. Critics of market failure
theory, like Ronald Coase, Harold Demsetz
and James M. Buchanan, argue that government
programs and policies also fall short of absolute
perfection. While all nations currently have
some kind of market regulations, the desirable
degree of regulation is disputed.
=== Counter-criticisms ===
==== Austrian School ====
Austrian School economists have argued that
capitalism can organize itself into a complex
system without an external guidance or central
planning mechanism. Friedrich Hayek considered
the phenomenon of self-organisation as underpinning
capitalism. Prices serve as a signal as to
the urgent and unfilled wants of people and
the opportunity to earn profits if successful,
or absorb losses if resources are used poorly
or left idle, gives entrepreneurs incentive
to use their knowledge and resources to satisfy
those wants. Thus the activities of millions
of people, each seeking his own interest,
are coordinated.
==== Ayn Rand ====
The novelist and philosopher Ayn Rand made
positive moral defenses of laissez-faire capitalism,
most notably in her 1957 novel Atlas Shrugged
and in her 1966 collection of essays Capitalism:
The Unknown Ideal. She argued that capitalism
should be supported on moral grounds, not
just on the basis of practical benefits. Her
ideas have had significant influence over
conservative and libertarian supporters of
capitalism, especially within the American
Tea Party movement. Rand defined capitalism
as "a social system based on the recognition
of individual rights, including property rights,
in which all property is privately owned".
According to Rand, the role of government
in a capitalist state has three broad categories
of proper functions: first, the police "to
protect men from criminals"; second, the armed
services "to protect men from foreign invaders";
and third, the law courts "to settle disputes
among men according to objective laws".
== See also
