History of theory of capitalism
Encyclopedia
A theory of capitalism describes the essential features of capitalism
and how it functions. The history of various such theories is the subject of this article.
focused on the role of enlightened self-interest (the "invisible hand") and the role of specialization
in promoting the efficiency of capital accumulation. Ayn Rand
maintained that capitalism is the only morally valid socio-political system because it allows people to be free to act in their rational self-interest, and asserted that no politico-economic system in history has ever proved its value so eloquently or has benefited mankind so greatly. She defined it as a social system based on the recognition of individual rights, including property rights, in which all property is privately owned, and adduced that capitalism is the unknown ideal
: people not knowing its nature, with the tacit compliance and silence of those who know better, and being its foundations battered by a flood of altruism, which is the cause of modern's world collapse. Robert LeFevre
, an American libertarian
and primary theorist of autarchism
, defined capitalism as savings and capital
in essence as the savings made by men which are then invested in the tools of production. Some proponents of capitalism (like Milton Friedman
) emphasize the role of free market
s, which, they claim, promote freedom
and democracy
. For many (like Immanuel Wallerstein
), capitalism hinges on the extension into a global dimension of an economic system in which goods and services are traded in market
s and capital good
s belong to non-state entities. For others (like Karl Marx
), it is defined by the creation of a labor market in which most people have to sell their labor power
in order to make a living. As Marx argued (see also Hilaire Belloc
), capitalism also differs from other market economies that feature private ownership through the concentration of the means of production in the hands of a few.
. His 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, theorized that within a given stable system of commerce and evaluation, individuals would respond to the incentive of earning more by specializing their production. These individuals would naturally, without specific state intervention, "direct ... that industry in such a manner as its produce may be of the greatest value." This would enable the whole economy to become more productive, and it would therefore be wealthier. Smith argued that protecting particular producers would lead to inefficient production, and that a national hoarding of specie (i.e. cash in the form of coinage) would only increase prices, in an argument similar to that advanced by David Hume
. His systematic treatment of how the exchange of goods, or a market
, would create incentives to act in the general interest, became the basis of what was then called political economy
and later economics
. It was also the basis for a theory of law and government which would gradually supersede the mercantilist regime that was then prevalent.
Smith asserts that when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable commodity. This notion underlies the concept of mutually-beneficial trade where it is held that both sides tend to benefit by an exchange.
Although he is often described as the "father of capitalism" (and the "father of economics
"), Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty
." However, Smith defined "capital" as stock, and "profit" as the just expectation of retaining the revenue from improvements made to that stock. Smith also viewed capital improvement as being the proper central aim of the economic and political system.http://www.adamsmith.org/smith/won-b2-c1.htm
A major difference between Adam Smith's view of economics and that of present day capitalist theory is that Adam Smith viewed value as a product of labor, and thus operated under the Labor Theory of Value
, which was used by basically all economists until the Labor Theory of Value became central to Marxism.
"The rich should contribute.. not in proportion to their revenue, but something more than in that proportion." is a quote by Adam Smith, but would be considered Marxist or Communist by today's conservative leaders.
. According to Marx, the treatment of labor as a commodity
led to people valuing things more in terms of their price rather than their usefulness (see commodity fetishism
), and hence to an expansion of the system of commodities
. Marx observed that some people bought commodities in order to use them, while others bought them in order to sell them on at a profit. Much of the history of late capitalism involves what David Harvey
called the "system of flexible accumulation" in which more and more things become commodities, the value of which is determined through the process of exchange rather than their use. For example, not only pins are commodities; shares in the ownership of a factory that manufactures pins become commodities; then options on the stock issued in the company that operates the factory become commodities; then portions of the interest rate attached to bonds issued by the company become commodities, and so on. The prevalence of commodity speculation in modern capitalism significantly shapes its outcomes.
Marx defines "capital" as money and "capitalist production" as the use of money to denominate wealth in money terms; these labels refer to John Stuart Mill
's definition of value in a market economy as being the going price for a good or service.
Marx expounded on the Labor Theory of Value
to show that according to the Labor Theory of Value (which was the theory of value that was used by Thomas Hobbes, John Locke, Adam Smith, David Ricardo, etc.) capitalists (owners of the means of production) exploit workers by depriving them of value that workers themselves create. According to Marx, surplus value is the difference between the value that the worker has created and the wage that the worker receives from his employer.
Once Marx firmly established this principle, the Labor Theory of Value was criticized and abandoned by supporters of capitalism.
government regulation of the market represents unjustified interference, and that economies would perform best with government only playing a defensive role in order to ensure the operation of free markets.
The next major revision of the theoretical basis of capitalism began in the late 19th century with the expansion of corporations and finance, the globalization of production and markets, and the increasing desire to tap the productive capacity of the capital sectors of economies in order to secure the markets and resources required to continue economic growth. The state came to be viewed by many, particularly by the wealthy, as a vehicle for improving business conditions, securing markets and gaining access to scarce materials, even when such objectives could only be achieved through military force. In the 1920s this philosophy found its most publicly prominent voice in President Calvin Coolidge
's assertion that "the business of America is business". Critics of this period label it "corporatism
", while its adherents generally regard it as a logical extension of the "laissez-faire
" principles of natural liberty.
during the Second Boer War
, observed the spectacle of the "Scramble for Africa
" and emphasized changes in European social structures and attitudes as well as capital flow, though his emphasis on the latter seems to have been the most influential and provocative. His so-called accumulation theory, very influential in its day, suggested that capitalism suffered from under-consumption due to the rise of monopoly capitalism and the resultant concentration of wealth in fewer hands, which he argued gave rise to a misdistribution of purchasing power. His thesis called attention to Europe's huge, impoverished industrial working class, which was typically far too poor to consume the goods that were produced by an industrialized economy. His analysis of capital flight and the rise of mammoth cartels later influenced Vladimir Lenin
in his book Imperialism: The Highest Stage of Capitalismhttp://www.marxists.org/archive/lenin/works/1916/imp-hsc/index.htm, which has become a basis for the neo-Marxist analysis of imperialism.
Although Hobson's works are still read, it is now widely acknowledged that his analysis neglected the mediating impact of a free-floating interest rate
on the accumulation of unused capital. His causal economic link between capitalism and imperialism therefore ultimately fails, although his discussions of capitalism's cultural impacts may still be valid.They understand the profits and increases of
Contemporary World-Systems theorist Immanuel Wallerstein
perhaps addresses better Hobson's counter-arguments without degrading Hobson's underlying inferences. Accordingly, Wallerstein's conception of imperialism as a part of a general and gradual extension of capital investment from the center of the industrial countries to an overseas periphery coincides with Hobson's. According to Wallerstein, Mercantilism
became the major tool of semi-peripheral, newly industrialized countries
such as Germany, France, Italy, and Belgium. Wallerstein thus perceives formal empire as performing a function that was analogous to that of the mercantilist drives of the late seventeenth and eighteenth centuries in England and France; consequently, the expansion of the Industrial Revolution contributed to the emergence of an era of aggressive national rivalry, leading to the late nineteenth-century scramble for Africa and the acquisition of formal empires.
, 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 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.
New institutional economics
, a field pioneered by Douglass North
, stresses the need of a legal framework in order for capitalism to function optimally, and focuses on the relationship between the historical development of capitalism and the creation and maintenance of political and economic institutions. In new institutional economics and other fields focusing on public policy, economists seek to judge when and whether governmental intervention (such as tax
es, welfare, and government regulation
) can result in potential gains in efficiency. According to Gregory Mankiw, a New Keynesian economist
, governmental intervention can improve on market outcomes under conditions of "market failure
," or situations in which the market on its own does not allocate resources efficiently. Market failure occurs when an externality
is present and a market will either underproduce a product with a positive externality or overproduce a product that generates a negative externality. Air pollution, for instance, is a negative externality that cannot be 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. In this view, market failures are often small, and government failures are sometimes large. It is therefore the case that imperfect markets are often better than imperfect governmental alternatives. While all nations currently have some kind of market regulations, the desirable degree of regulation is disputed.
The relationship between democracy
and capitalism is a contentious area in theory and 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 many theorists to posit a causal relationship between them, or that each affects the other. However, in the 20th century, according to some authors, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist
regimes, monarchies, and single-party states, while it has been observed that many democratic societies such as the Bolivarian Republic of Venezuela and Anarchist Catalonia
have been expressly anti-capitalist. While some thinkers argue that capitalist development more-or-less inevitably eventually leads to the emergence of democracy, others dispute this claim. Research on the democratic peace theory
further indicates that capitalist democracies rarely make war with one another and have little internal violence. However critics of the democratic peace theory note that democratic capitalist states may fight infrequently or never with other democratic capitalist states because of political similarity or political stability rather than because they are democratic (or capitalist).
Some commentators argue that though economic growth under capitalism has led to democratization in the past, it may not do so in the future. Under this line of thinking, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.
In response to criticism of the system, some proponents of capitalism have argued that its advantages are supported by empirical research. For example, advocates of different Index of Economic Freedom
point to a statistical correlation between nations with more economic freedom (as defined by the Indices) and higher scores on variables such as income and life expectancy, including the poor in these nations.
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
and how it functions. The history of various such theories is the subject of this article.
Overview
Conception of what constitutes capitalism has changed significantly over time, as well as being dependent on the political perspective and analytical approach adopted by the observer in question. Adam SmithAdam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
focused on the role of enlightened self-interest (the "invisible hand") and the role of specialization
Departmentalization
Departmentalization refers to the process of grouping activities into departments.Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments....
in promoting the efficiency of capital accumulation. Ayn Rand
Ayn Rand
Ayn Rand was a Russian-American novelist, philosopher, playwright, and screenwriter. She is known for her two best-selling novels The Fountainhead and Atlas Shrugged and for developing a philosophical system she called Objectivism....
maintained that capitalism is the only morally valid socio-political system because it allows people to be free to act in their rational self-interest, and asserted that no politico-economic system in history has ever proved its value so eloquently or has benefited mankind so greatly. She defined it as a social system based on the recognition of individual rights, including property rights, in which all property is privately owned, and adduced that capitalism is the unknown ideal
Capitalism: the Unknown Ideal
Capitalism: The Unknown Ideal is a collection of essays, mostly by Ayn Rand, with additional essays by her associates Nathaniel Branden, Alan Greenspan and Robert Hessen. The book focuses on the moral nature of laissez-faire capitalism and private property...
: people not knowing its nature, with the tacit compliance and silence of those who know better, and being its foundations battered by a flood of altruism, which is the cause of modern's world collapse. Robert LeFevre
Robert LeFevre
Robert LeFevre was an American libertarian businessman, radio personality, and primary theorist of autarchism.-Early life:...
, an American libertarian
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
and primary theorist of autarchism
Autarchism
Autarchism is a political philosophy that upholds the principle of individual liberty, rejects compulsory government, and supports the elimination of government in favor of ruling oneself and no other...
, defined capitalism as savings and capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
in essence as the savings made by men which are then invested in the tools of production. Some proponents of capitalism (like Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
) emphasize the role of free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
s, which, they claim, promote freedom
Freedom (political)
Political freedom is a central philosophy in Western history and political thought, and one of the most important features of democratic societies...
and democracy
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...
. For many (like Immanuel Wallerstein
Immanuel Wallerstein
Immanuel Maurice Wallerstein is a US sociologist, historical social scientist, and world-systems analyst...
), capitalism hinges on the extension into a global dimension of an economic system in which goods and services are traded in market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s and capital good
Capital good
A capital good, or simply capital in economics, is a manufactured means of production. Capital goods are acquired by a society by saving wealth which can be invested in the means of production....
s belong to non-state entities. For others (like Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
), it is defined by the creation of a labor market in which most people have to sell their labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
in order to make a living. As Marx argued (see also Hilaire Belloc
Hilaire Belloc
Joseph Hilaire Pierre René Belloc was an Anglo-French writer and historian who became a naturalised British subject in 1902. He was one of the most prolific writers in England during the early twentieth century. He was known as a writer, orator, poet, satirist, man of letters and political activist...
), capitalism also differs from other market economies that feature private ownership through the concentration of the means of production in the hands of a few.
Adam Smith
The first theorist of what we commonly refer to as capitalism is usually considered to be Adam SmithAdam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
. His 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, theorized that within a given stable system of commerce and evaluation, individuals would respond to the incentive of earning more by specializing their production. These individuals would naturally, without specific state intervention, "direct ... that industry in such a manner as its produce may be of the greatest value." This would enable the whole economy to become more productive, and it would therefore be wealthier. Smith argued that protecting particular producers would lead to inefficient production, and that a national hoarding of specie (i.e. cash in the form of coinage) would only increase prices, in an argument similar to that advanced by David Hume
David Hume
David Hume was a Scottish philosopher, historian, economist, and essayist, known especially for his philosophical empiricism and skepticism. He was one of the most important figures in the history of Western philosophy and the Scottish Enlightenment...
. His systematic treatment of how the exchange of goods, or a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, would create incentives to act in the general interest, became the basis of what was then called political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
and later economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
. It was also the basis for a theory of law and government which would gradually supersede the mercantilist regime that was then prevalent.
Smith asserts that when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable commodity. This notion underlies the concept of mutually-beneficial trade where it is held that both sides tend to benefit by an exchange.
Although he is often described as the "father of capitalism" (and the "father of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
"), Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty
Liberty
Liberty is a moral and political principle, or Right, that identifies the condition in which human beings are able to govern themselves, to behave according to their own free will, and take responsibility for their actions...
." However, Smith defined "capital" as stock, and "profit" as the just expectation of retaining the revenue from improvements made to that stock. Smith also viewed capital improvement as being the proper central aim of the economic and political system.http://www.adamsmith.org/smith/won-b2-c1.htm
A major difference between Adam Smith's view of economics and that of present day capitalist theory is that Adam Smith viewed value as a product of labor, and thus operated under the Labor Theory of Value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
, which was used by basically all economists until the Labor Theory of Value became central to Marxism.
"The rich should contribute.. not in proportion to their revenue, but something more than in that proportion." is a quote by Adam Smith, but would be considered Marxist or Communist by today's conservative leaders.
Karl Marx
It is generally considered that the most thorough and enduring critique of the results of capitalism was the one formulated by Karl MarxKarl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
. According to Marx, the treatment of labor as a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
led to people valuing things more in terms of their price rather than their usefulness (see commodity fetishism
Commodity fetishism
In Marx's critique of political economy, commodity fetishism denotes the mystification of human relations said to arise out of the growth of market trade, when social relationships between people are expressed as, mediated by and transformed into, objectified relationships between things .The...
), and hence to an expansion of the system of commodities
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
. Marx observed that some people bought commodities in order to use them, while others bought them in order to sell them on at a profit. Much of the history of late capitalism involves what David Harvey
David Harvey (geographer)
David Harvey is the Distinguished Professor of Anthropology at the Graduate Center of the City University of New York . A leading social theorist of international standing, he received his PhD in Geography from University of Cambridge in 1961. Widely influential, he is among the top 20 most cited...
called the "system of flexible accumulation" in which more and more things become commodities, the value of which is determined through the process of exchange rather than their use. For example, not only pins are commodities; shares in the ownership of a factory that manufactures pins become commodities; then options on the stock issued in the company that operates the factory become commodities; then portions of the interest rate attached to bonds issued by the company become commodities, and so on. The prevalence of commodity speculation in modern capitalism significantly shapes its outcomes.
Marx defines "capital" as money and "capitalist production" as the use of money to denominate wealth in money terms; these labels refer to John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...
's definition of value in a market economy as being the going price for a good or service.
Marx expounded on the Labor Theory of Value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
to show that according to the Labor Theory of Value (which was the theory of value that was used by Thomas Hobbes, John Locke, Adam Smith, David Ricardo, etc.) capitalists (owners of the means of production) exploit workers by depriving them of value that workers themselves create. According to Marx, surplus value is the difference between the value that the worker has created and the wage that the worker receives from his employer.
Once Marx firmly established this principle, the Labor Theory of Value was criticized and abandoned by supporters of capitalism.
Historical development
During the course of the eighteenth and nineteenth centuries, there was a gradual movement in Europe and in the states that Europeans had founded, for the reduction of trade barriers, in particular restrictions on production and labor, the use of non-standard weights and measures, restrictions on the formation of new businesses, and the curtailing of royal prerogatives that interfered with the conduct of commerce. Two parallel doctrines emerged to describe and justify this process. One was the legal doctrine that the rightful owner of land or exerciser of a property right was the one that could make the best economic use of it, and that this principle must be reflected in the property laws of each nation. The other was the political doctrine of laissez-faire economics, namely that all coerciveCoercion
Coercion is the practice of forcing another party to behave in an involuntary manner by use of threats or intimidation or some other form of pressure or force. In law, coercion is codified as the duress crime. Such actions are used as leverage, to force the victim to act in the desired way...
government regulation of the market represents unjustified interference, and that economies would perform best with government only playing a defensive role in order to ensure the operation of free markets.
The next major revision of the theoretical basis of capitalism began in the late 19th century with the expansion of corporations and finance, the globalization of production and markets, and the increasing desire to tap the productive capacity of the capital sectors of economies in order to secure the markets and resources required to continue economic growth. The state came to be viewed by many, particularly by the wealthy, as a vehicle for improving business conditions, securing markets and gaining access to scarce materials, even when such objectives could only be achieved through military force. In the 1920s this philosophy found its most publicly prominent voice in President Calvin Coolidge
Calvin Coolidge
John Calvin Coolidge, Jr. was the 30th President of the United States . A Republican lawyer from Vermont, Coolidge worked his way up the ladder of Massachusetts state politics, eventually becoming governor of that state...
's assertion that "the business of America is business". Critics of this period label it "corporatism
Corporatism
Corporatism, also known as corporativism, is a system of economic, political, or social organization that involves association of the people of society into corporate groups, such as agricultural, business, ethnic, labor, military, patronage, or scientific affiliations, on the basis of common...
", while its adherents generally regard it as a logical extension of the "laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
" principles of natural liberty.
Capitalism and imperialism
J. A. Hobson, a British liberal writing at the time of the fierce debate concerning imperialismImperialism
Imperialism, as defined by Dictionary of Human Geography, is "the creation and/or maintenance of an unequal economic, cultural, and territorial relationships, usually between states and often in the form of an empire, based on domination and subordination." The imperialism of the last 500 years,...
during the Second Boer War
Second Boer War
The Second Boer War was fought from 11 October 1899 until 31 May 1902 between the British Empire and the Afrikaans-speaking Dutch settlers of two independent Boer republics, the South African Republic and the Orange Free State...
, observed the spectacle of the "Scramble for Africa
Scramble for Africa
The Scramble for Africa, also known as the Race for Africa or Partition of Africa was a process of invasion, occupation, colonization and annexation of African territory by European powers during the New Imperialism period, between 1881 and World War I in 1914...
" and emphasized changes in European social structures and attitudes as well as capital flow, though his emphasis on the latter seems to have been the most influential and provocative. His so-called accumulation theory, very influential in its day, suggested that capitalism suffered from under-consumption due to the rise of monopoly capitalism and the resultant concentration of wealth in fewer hands, which he argued gave rise to a misdistribution of purchasing power. His thesis called attention to Europe's huge, impoverished industrial working class, which was typically far too poor to consume the goods that were produced by an industrialized economy. His analysis of capital flight and the rise of mammoth cartels later influenced Vladimir Lenin
Vladimir Lenin
Vladimir Ilyich Lenin was a Russian Marxist revolutionary and communist politician who led the October Revolution of 1917. As leader of the Bolsheviks, he headed the Soviet state during its initial years , as it fought to establish control of Russia in the Russian Civil War and worked to create a...
in his book Imperialism: The Highest Stage of Capitalismhttp://www.marxists.org/archive/lenin/works/1916/imp-hsc/index.htm, which has become a basis for the neo-Marxist analysis of imperialism.
Although Hobson's works are still read, it is now widely acknowledged that his analysis neglected the mediating impact of a free-floating interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
on the accumulation of unused capital. His causal economic link between capitalism and imperialism therefore ultimately fails, although his discussions of capitalism's cultural impacts may still be valid.They understand the profits and increases of
Contemporary World-Systems theorist Immanuel Wallerstein
Immanuel Wallerstein
Immanuel Maurice Wallerstein is a US sociologist, historical social scientist, and world-systems analyst...
perhaps addresses better Hobson's counter-arguments without degrading Hobson's underlying inferences. Accordingly, Wallerstein's conception of imperialism as a part of a general and gradual extension of capital investment from the center of the industrial countries to an overseas periphery coincides with Hobson's. According to Wallerstein, Mercantilism
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
became the major tool of semi-peripheral, newly industrialized countries
Newly industrialized countries
The category of newly industrialized country is a socioeconomic classification applied to several countries around the world by political scientists and economists....
such as Germany, France, Italy, and Belgium. Wallerstein thus perceives formal empire as performing a function that was analogous to that of the mercantilist drives of the late seventeenth and eighteenth centuries in England and France; consequently, the expansion of the Industrial Revolution contributed to the emergence of an era of aggressive national rivalry, leading to the late nineteenth-century scramble for Africa and the acquisition of formal empires.
Democracy, the state, and legal frameworks
The relationship between the stateState (polity)
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
, 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
Hernando de Soto (economist)
Hernando de Soto is a Peruvian economist known for his work on the informal economy and on the importance of business and property rights. He is the president of the Institute for Liberty and Democracy , located in Lima, Peru.-Childhood and education:Hernando de Soto was born in 1941 in Arequipa,...
is a contemporary 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.
New institutional economics
New institutional economics
New institutional economics is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules that underlie economic activity.-Overview:...
, a field pioneered by Douglass North
Douglass North
Douglass Cecil North is an American economist known for his work in economic history. He is the co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences...
, stresses the need of a legal framework in order for capitalism to function optimally, and focuses on the relationship between the historical development of capitalism and the creation and maintenance of political and economic institutions. In new institutional economics and other fields focusing on public policy, economists seek to judge when and whether governmental intervention (such as tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es, welfare, and government regulation
Regulatory economics
Regulatory economics is the economics of regulation, in the sense of the application of law by government that is used for various purposes, such as centrally-planning an economy, remedying market failure, enriching well-connected firms, or benefiting politicians...
) can result in potential gains in efficiency. According to Gregory Mankiw, a New Keynesian economist
New Keynesian economics
New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.Two main assumptions define the New...
, governmental intervention can improve on market outcomes under conditions of "market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
," or situations in which the market on its own does not allocate resources efficiently. Market failure occurs when an externality
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
is present and a market will either underproduce a product with a positive externality or overproduce a product that generates a negative externality. Air pollution, for instance, is a negative externality that cannot be 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
Ronald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
, Harold Demsetz
Harold Demsetz
Harold Demsetz is a professor emeritus of economics at the University of California at Los Angeles .-Career:Demsetz includes a short intellectual autobiography....
, and James M. Buchanan
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...
argue that government programs and policies also fall short of absolute perfection. In this view, market failures are often small, and government failures are sometimes large. It is therefore the case that imperfect markets are often better than imperfect governmental alternatives. While all nations currently have some kind of market regulations, the desirable degree of regulation is disputed.
The relationship between democracy
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...
and capitalism is a contentious area in theory and popular political movements. The extension of universal adult male suffrage
Suffrage
Suffrage, political franchise, or simply the franchise, distinct from mere voting rights, is the civil right to vote gained through the democratic process...
in 19th century Britain occurred along with the development of industrial capitalism, and democracy became widespread at the same time as capitalism, leading many theorists to posit a causal relationship between them, or that each affects the other. However, in the 20th century, according to some authors, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist
Fascism
Fascism is a radical authoritarian nationalist political ideology. Fascists seek to rejuvenate their nation based on commitment to the national community as an organic entity, in which individuals are bound together in national identity by suprapersonal connections of ancestry, culture, and blood...
regimes, monarchies, and single-party states, while it has been observed that many democratic societies such as the Bolivarian Republic of Venezuela and Anarchist Catalonia
Anarchist Catalonia
Anarchist Catalonia was the part of Catalonia controlled by the anarchist Confederación Nacional del Trabajo during the Spanish Civil War.-Anarchists enter government:...
have been expressly anti-capitalist. While some thinkers argue that capitalist development more-or-less inevitably eventually leads to the emergence of democracy, others dispute this claim. Research on the democratic peace theory
Democratic peace theory
Democratic peace theory is the theory that democracies don't go to war with each other. How well the theory matches reality depends a great deal on one's definition of "democracy" and "war"...
further indicates that capitalist democracies rarely make war with one another and have little internal violence. However critics of the democratic peace theory note that democratic capitalist states may fight infrequently or never with other democratic capitalist states because of political similarity or political stability rather than because they are democratic (or capitalist).
Some commentators argue that though economic growth under capitalism has led to democratization in the past, it may not do so in the future. Under this line of thinking, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.
In response to criticism of the system, some proponents of capitalism have argued that its advantages are supported by empirical research. For example, advocates of different Index of Economic Freedom
Index of Economic Freedom
The Index of Economic Freedom is a series of 10 economic measurements created by The Heritage Foundation and The Wall Street Journal. Its stated objective is to measure the degree of economic freedom in the world's nations....
point to a statistical correlation between nations with more economic freedom (as defined by the Indices) and higher scores on variables such as income and life expectancy, including the poor in these nations.
External links
- Capitalism by Robert HessenRobert HessenRobert Hessen, Ph.D., is an American economic and business historian, a widely published author, a professor in the Graduate School of Business at Stanford, and a senior research fellow at Stanford University's Hoover Institution. Among the books he has written or edited are Steel Titan: The Life...
- says "capitalism" is a misnomer for "economic individualism" and discusses the emergence of capitalism