Capitalism: Definition, Meaning, History, Types, Characteristics, Examples, Capitalist Countries and Criticism

Definition and Meaning of Capitalism

The term “capitalist”, meaning an owner of capital, appears earlier than the term “capitalism” and dates to the mid-17th century. “Capitalism” is derived from capital, which evolved from capitale, a Late Latin word based on caput, meaning “head” which is 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 to refer to funds, stock of merchandise, and sum of money or money carrying interest. By 1283, it was used in the sense of the capital assets of a trading firm and was often interchanged with other words such as wealth, money, funds, goods, assets, property etc.

Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, a price system, private property and the recognition of property rights, voluntary exchange and wage labor.

In a capitalist market economy, decision-making and investments are determined by owners of wealth, property, or production ability in capital and financial markets whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.

Economists, historians, political economists and sociologists 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, state capitalism and welfare capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition and state-sanctioned social policies.

The level of competition in markets and the role of intervention and regulation as well as the scope of state ownership vary across different models of capitalism. The extent to which different markets are free and the rules defining private property are matters of politics and policy. Most of the existing capitalist economies are mixed economies that 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 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. 

Economic growth is a characteristic tendency of capitalist economies.

Capitalism is an economic system in which private individuals or businesses own capital goods. The production of goods and services is based on supply and demand in the general market known as a market economy rather than through central planning known as a planned economy or command economy.

The purest form of capitalism is free market or laissez faire capitalism. Here, private individuals are unrestrained. They may determine where to invest, what to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace operates without checks or controls.

Nowadays, the majority countries put into practice a mixed capitalist system that includes some degree of government regulation of business and ownership of select industries.

 

Brief History of Capitalism

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 labor. Simple commodity exchange and consequently simple commodity production, which is the initial basis for the growth of capital from trade, have a very long history. 

Arabs 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.

Broader processes of globalization carried capitalism across the world. 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. Late in the 20th century, capitalism overcame a challenge by centrally-planned economies and is now the encompassing system worldwide, with the mixed economy as 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. The imperialism of the 18th-century decisively shaped globalization in this period.

After the First and Second Opium Wars (1839-1860) and the completion of the British conquest of India, vast populations of Asia became ready consumers of European exports. Also in this period, Europeans colonized areas of sub-Saharan Africa and the Pacific islands. 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.

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 railways allowed goods and information to move around the world to an unprecedented degree.

In the period following the global depression of the 1930s, governments played an increasingly prominent role in the capitalistic system throughout much of the world.

Contemporary capitalist societies developed in the West from 1950 to the present and this type of system continues to expand throughout different regions of the world relevant examples started in the United States after the 1950s, France after the 1960s, Spain after the 1970s, Poland after 2015, and others. At this stage capitalist markets are considered developed and are characterized by developed private and public markets for equity and debt, a high standard of living (as characterized by the World Bank and the IMF), large institutional investors and a well-funded banking system. A significant managerial class has emerged and decides on a significant proportion of investments and other decisions. A different future than that envisioned by Marx has started to emerge explored and described by Anthony Crosland in the United Kingdom in his 1956 book The Future of Socialism  and by John Kenneth Galbraith in North America in his 1958 book The Affluent Society, 90 years after Marx’s research on the state of capitalism in 1867.

The postwar boom ended in the late 1960s and early 1970s and the economic situation grew worse with the rise of stagflation. Monetarism, a modification of Keynesianism that is more compatible with laissez-faire analyses, gained increasing prominence in the capitalist world, especially under the years in office of Ronald Reagan in the United States (1981-1989) and of Margaret Thatcher in the United Kingdom (1979-1990). 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”.

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.

 

Types of Capitalism

a) Crony capitalism

b) Democratic capitalism

c) Free-marketcapitalism

d) Mercantilism

e) Social market economy

f) State capitalism

g) Welfare capitalism

 

Crony Capitalism: These can be to a capitalist society that is based on the close relationships between business people and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the government in the form of tax breaks, government grants, and other incentives. This is the leading form of capitalism worldwide due to the powerful incentives both faced by governments to extract resources by taxing, regulating, and fostering rent-seeking activity, and those faced by capitalist businesses to increase profits by obtaining subsidies, limiting competition, and erecting barriers to entry. In effect, these forces represent a kind of supply and demand for government intervention in the economy, which arises from the economic system itself. 

Crony capitalism is extensively responsible for a range of social and economic woes. Equally, socialists and capitalists blame each other for the rise of crony capitalism. Socialists believe that crony capitalism is the inevitable result of pure capitalism. On the other hand, capitalists believe that crony capitalism arises from the need of socialist governments to control the economy.

 

Democratic Capitalism: Assumes pluralism, recognizing that individuals have different opinions and interests, allowing them to associate freely in order to further those interests. Dr. Edward Younkins, author of democratic capitalism

Capitalism and commerce, describes three tenets of the democratic capitalist system: 

1. Economy based predominantly on free markets and economic incentives.

2. A democratic polity.

3. A classical-liberal moral cultural system that encourages pluralism.

The Founding Fathers of the United States believed in democratic capitalism, firmly placing value on liberty and equality in the United State constitution.

Free-market Capitalism: A capitalist free-market economy is an economic system where prices for goods and services are set entirely by the forces of supply and demand and are expected, by its adherents, to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets and private ownership of the means of production. Laissez-faire capitalism is a more extensive form of this free-market economy, but one in which the role of the state is limited to protecting property rights. In anarcho-capitalist theory, property rights are protected by private firms and market-generated law. According to anarcho-capitalists, this entails property rights without statutory law through market-generated tort, contract and property law, and self-sustaining private industry.

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 with state-interest and imperialism. 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, France and Portugal). 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.

Social market economy: A social market economy is a free-market or mixed-market capitalist system, sometimes classified as a coordinated market economy, where government intervention in price formation is kept to a minimum, but the state provides significant services in areas such as social security, health care, unemployment benefits and the 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 is the contemporary model of capitalism and adaptation of the social market model that exists in continental Western Europe today.

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. 

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”.

 

Welfare Capitalism: Is capitalism that includes social welfare policies. Today, welfare capitalism is most often associated with the models of capitalism found in Central Mainland and Northern Europe such as the Nordic model, social market economy and Rhine capitalism. In some cases, welfare capitalism exists within a mixed economy, but welfare states can and do exist independently of policies common to mixed economies such as state interventionism and extensive regulation.

A mixed economy is a largely market-based capitalist 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.

 

Characteristics of Capitalism

Broadly speaking, capitalism as an economic system and mode of production can be summarized by the following:

a) 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.

b) Private ownership of the means of production.

c) The investment of money to make a profit.

d) Commodity production: production for exchange on a market and to maximize exchange value instead of use value.

e) High levels of wage labor.

f)   The use of the price mechanism to allocate resources between competing uses.

g) Economically efficient use of the factors of production and raw materials due to maximization of value added in the production process.

h) Freedom of capitalists to act in their self-interest in managing their business and investments.

 

Top Capitalist Countries of the World

The most requirements to capitalism are freedom. According to Economic Freedom Index, a database that measures economic freedom based upon quantitative and qualitative factors, or regulatory efficiency, the following countries can be considered capitalist countries. Countries are listed in order of those with the greatest quantifiable economic freedom as of 2021.

Singapore

New Zealand

Australia

Switzerland

Ireland

Taiwan

United Kingdom

Estonia

Canada

Denmark

Iceland

Georgia

Mauritius

United Arab Emirates

Lithuania

The Netherlands

Finland

Luxembourg

Chile

United States

Sweden

Malaysia

Japan

South Korea

Austria

 

Criticism of Capitalism

Criticism of capitalism comes from various political and philosophical approaches, including anarchist, socialist, religious and nationalist viewpoints. Some believe that capitalism can only be overcome through revolution while others believe that structural change can come slowly through political reforms. Some critics believe there are merits in capitalism and wish to balance it with some form of social control, typically through government regulation (e.g. the social market movement).

Prominent critiques of capitalism are that it is inherently exploitative, alienating, unstable, unsustainable, and inefficient and that it creates massive economic inequality, commodities people, degrades the environment, is anti-democratic, and leads to an erosion of human rights because of its incentivization of imperialist expansion and war. Critics of capitalism argue as follows:

a) That it concentrates power in the hands of a minority capitalist class that exists through the exploitation of the majority working class and their labor.

b) That prioritizes profit over social good, natural resources and the environment.

c) That an engine of inequality, corruption and economic instabilities.

d) That anti-democratic.

e) That many are not able to access its purported benefits and freedoms, such as freely investing.

Supporters argue that it provides better products and innovation through competition, promotes pluralism and decentralization of power, disperses wealth to people who are able to invest in useful enterprises based on market demands, allows for a flexible incentive system where efficiency and sustainability are priorities to protect capital, creates strong economic growth, and yields productivity and prosperity that greatly benefit society.