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Capitalism is the name given to the economic system that incorporates free enterprise and a market system by Karl Marx, the founder of communism. By the textbook definition, capitalism is an economic system in which private individuals and business firms carry on the production and the exchange of goods and services through a complex network of prices and markets. (Heilbroner1 13-15) Capitalism is a philosophy that originated in Europe, where it evolved and reached its pinnacle in the nineteenth century. During the nineteenth century capitalism spread throughout the world and to the United States. The United States adopted the ideas of capitalism and put them into practice making capitalism Americas economic system. Capitalism has been for the most part the dominant economic system in the world and has only been challenged on limited occasions by other economic systems such as socialism and communism. (Heilbroner2 36-40)
Capitalism, as does any other economic system, has several key characteristics that define it. First, basic production facilities such as land and capital are privately owned. Second, economic activity is organized and coordinated through the interaction between the buyers and the sellers in markets. Third, owners of the land and capital as well as the workers they employ are free to pursue their own self interest in seeking maximum gain from their resources and labor in production. This means that consumers may spend their incomes in whatever way they wish, which is a principle called consumer sovereignty. This principle reflects the idea that under capitalism, producers will be forced by competition to use their resources in ways that will most efficiently satisfy the desires of the consumers. Thus allowing self-interest to drive the economy. The fourth characteristic of capitalism is that there is a minimum of government supervision required. If competition is present, the activity of the economy will be self-regulating. Government action is only necessary when needed to uphold the rights of private property and to guarantee contracts. The most important characteristic of a capitalistic economic system is its goal. According to Robert Heilbroner, The elusive goal for a capitalist nation is to secure, simultaneously, high employment and stable prices. (Heilbroner1 65)
The origination of capitalism took place in Europe mainly during the thirteenth century and onward. The developments society underwent in Europe during the Renaissance and the Reformation were vital in the emergence of the modern nation-state. The nation state provided the essential peace, law, and order that are crucial for capitalism to grow. This growth is achieved through the accumulation of an economic surplus by the private entrepreneur and the funneling of this surplus back into the capitalist system for further expansion. Therefore without some minimum of peace, law and order, this cycle would not continue and capitalism would not be successful. (Heilbroner 147)
As time rolled on capitalism continued to evolve. During the time period between the fifteenth century and the eighteenth century, when capitalism developed in another unique direction called mercantilism. The mercantilist system focused on the interests of the state rather than self-interest. The key idea of mercantilism is a surplus of exports over imports. This idea was the product of the states preoccupation with accumulating national wealth. Mercantilism eliminated much of the self-interest needed for capitalism. Therefore mercantilism did not survive when capitalism evolved to the next step. (Heilbroner1 148-150)
Adam Smith, the man who ushered in modern capitalism, attacked the idea of mercantilism. Smith believed in a natural economic order, or one with limited government regulation. Smith also felt the division of labor was important. He thought it was, The extension of markets almost limitless possibilities for society to expand and trade. (Heilbroner2 143) Another key step toward modern capitalism was the Industrial Revolution. This was when mechanical power took over the place of animal power in the production of goods and services. In effect, production became more specialized and concentrated in larger units known as factories. (Heilbroner1 152)
When the Industrial Revolution took full swing in the United States, the government adopted Laissez-Faire Capitalism. This meant that the idea of government regulation of business was alien to the prevailing economic beliefs of capitalism. Quite simply the government left business alone and a business either made it or it did not. Adam Smith said, Businesses should be regulated, not by the government, but by the invisible hand of the law of supply and demand. (Newman 339) The theory was, if government kept their hands off, businesses would be motivated by their own self interests to offer improved goods and services at low prices. This basically meant only the fit would survive in the economy. That is exactly what happened and the monopolistic trusts began to rise, which decreased the competition needed for natural regulation. Anti-trust laws were eventually passed and allowed for the restoration of the competition in the market. (Newman 342)
During the twentieth century wars, revolution, and depression have buffeted capitalism. The greatest challenge to face capitalism came in the late 1920s to the 1930s during the Great Depression. The Great depression was caused by many reasons, mainly over speculation of the stock market. President Franklin D. Roosevelt restructured the financial system with his New Deal so as to prevent a repeat of the excess speculation that had led to the financial collapse in 1929. Action was taken to encourage collective bargaining and build a strong labor movement in order to offset the concentration of economic power in large industrial corporations. Also modern welfare was introduced through social security and unemployment insurance. These were measures that were designed to protect people from the dangers of a capitalist system. (Newman 492) The New Deal is an example of a capitalist systems remarkable ability to survive and adapt to change. Also the New Deal is an example of how some government regulation can be beneficial to a capitalist system.
Today in the year 2000, capitalism is still the dominant economic system. The question for the future is will Global Capitalization take place and more importantly will it succeed? Global Capitalization is the rise of market capitalism around the world. It incorporates a free market system throughout the world with no economic boundaries. However the question remains how can this be done efficiently and erase all of the current problems? One of these problems for example could be an American company building a factory in Africa and globalize. However the problem could be that the American company is doing business in Africa because there may be certain regulations such as environmental laws in the U.S. that do not exist elsewhere. For Global Capitalism to move into the next stage will require a much more sophisticated look at the costs and benefits of open markets. (Engardio 72-76) Only the future may decide where capitalism is heading, but if the past is any indication, capitalism will correct itself where needed and succeed.