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Capitalism

2007 Schools Wikipedia Selection. Related subjects: Politics and government

   Capitalism is an economic system in which the competing owners of means
   of production employ waged labor to produce commodities for sale in a
   largely free market with a view to making a profit.

   Various theories have tried to explain what capitalism is, to justify
   or critique the private ownership of capital, to explain the operation
   of markets, and to guide the application or elimination of government
   regulation of property and markets. (See economics, political economy,
   laissez-faire.)
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   Capitalist economic practices became institutionalized in Europe
   between the 16th and 19th centuries, although some features of
   capitalist organization existed in the ancient world. Capitalism has
   emerged as the Western world's dominant economic system since the
   decline of feudalism, which eroded traditional political and religious
   restraints on capitalist exchange. Since the Industrial Revolution,
   capitalism gradually spread from Europe, particularly from Britain,
   across political and cultural frontiers. In the 19th and 20th
   centuries, capitalism provided the main, but not exclusive, means of
   industrialization throughout much of the world.

   The concept of capitalism has limited analytic value, given the great
   variety of historical cases over which it is applied, varying in time,
   geography, politics and culture. Some economists have specified a
   variety of different types of capitalism, depending on specifics of
   concentration of economic power and wealth, and methods of capital
   accumulation (Scott 2005). During the last century capitalism has been
   contrasted with centrally planned economies. Most developed countries
   are usually regarded as capitalist, but some are also often called
   mixed economies due to government ownership and regulation of
   production, trade, commerce, taxation, money-supply, and physical
   infrastructure.

Etymology

   According to Webster's Third New International Dictionary, the root
   word, capital, derives from the Latin word capitalis, which ultimately
   comes from caput, meaning "head." The 'head' being referred to was that
   of cattle. The Oxford English Dictionary cited its first use of the
   word capitalism in 1854, and capitalist in 1792. Marxist writers
   originally popularized the term "capitalism" (or its equivalents in
   other languages, such as Kapitalismus) although Marx tended to speak of
   the "capitalist mode of production" or " bourgeois society."
   Nevertheless, the term has been widely adopted across the political
   spectrum, though employed in many different ways (Burnham).

Perspectives on the characteristics of capitalism

   The concept of capitalism has evolved over time, with later thinkers
   often building on the analyses of earlier thinkers. Moreover, the
   component concepts used in defining capitalism—such as private
   ownership, markets, and investment—have evolved along with changes in
   theory, in law, and in practice. The following subsections describe
   several schools of thought in which the thinkers involved do not
   necessarily agree on all analytic points, but participate in a common
   general approach to understanding what capitalism is.

Classical political economy

   The "classical" tradition in economic thought emerged in Britain in the
   late 18th century. The classical political economists Adam Smith, David
   Ricardo, Jean-Baptiste Say, and John Stuart Mill published analyses of
   the production, distribution, and exchange of goods in a capitalist
   economy that have since formed the basis of study for most contemporary
   economists. Contributions to this tradition are also found in the
   earlier work of David Hume and the Physiocrats like Richard Cantillon.
   Adam Smith
   Enlarge
   Adam Smith

   Adam Smith's attack on Mercantilism and his reasoning for "the system
   of natural liberty" in The Wealth of Nations (1776), are usually taken
   as the beginning of classical political economy. Smith devised a set of
   concepts that remain strongly associated with capitalism today,
   particularly his theory of the " invisible hand" of the market, through
   which the pursuit of individual interest produces a collective good for
   society. He criticized monopolies, tariffs, duties, and other state
   enforced restrictions of his time and believed that the market is the
   most fair and efficient arbitrator of resources. This view was shared
   by David Ricardo, second most important of the classical political
   economists and one of the most influential economists of modern times.
   In The Principles of Political Economy and Taxation (1817) he developed
   law of comparative advantage, which explains why it is profitable for
   two parties to trade, even if one of the trading partners is more
   efficient in every type of economic production. This principle supports
   the economic case for free trade. Ricardo was a supporter of Say's Law
   and held view that full employment is the normal equilibrium for a
   competitive economy. He also argued that inflation is closely related
   to changes in quantity of money and credit and was a proponent of the
   law of diminishing returns, which states that each additional unit of
   input yields less and less additional output.

   The values of classical political economy are strongly associated with
   the classical liberal doctrine of minimal government intervention in
   the economy. Liberal capitalist thought has generally assumed a clear
   division between the economy and other realms of social activity, such
   as the state.

Marxian political economy

   Karl Marx
   Enlarge
   Karl Marx

   Karl 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)
   in which capital has become the dominant means of production (Burnham).
   The capitalist stage of development or "bourgeois society," for Marx,
   represented the most advanced form of social organization to date.

   Following Adam Smith, Marx distinguished the use value of commodities
   from their exchange value in the market. Capital, according to Marx, is
   created with the purchase of commodities for the purpose of creating
   new commodities with a higher exchange value higher than the sum of the
   original purchases. For Marx, the use of labor power had itself become
   a commodity under capitalism; 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 societies had extracted surplus labor, but capitalism
   was new in doing so via the sale-value of produced commodities.

   For Marx, this cycle the extraction of the surplus value by the owners
   of capital or the bourgeoisie becomes the basis of class struggle.
   However, this argument is intertwined with Marx's labor theory of value
   asserting that labor is the source of all value, and thus of profit.
   This theory is contested by most current economists, including some
   contemporary Marxian economists (Scott 2005). One line of subsequent
   Marxian thinking sees the centrally-planned economic systems of
   existing "communist" societies that were still based on exploitation of
   labor as " state capitalism."

   Some 20th century Marxian economists consider capitalism to be a social
   formation where capitalist class processes dominate, but are not
   exclusive (Resnick & Wolff). Capitalist class processes, to these
   thinkers, are simply those in which surplus labour takes the form of
   surplus value, usable as capital; other tendencies for utilization of
   labor nonetheless exist simultaneously in existing societies where
   capitalist processes are predominant.

Weberian political sociology

   In some social sciences, the understanding of the defining
   characteristics of capitalism have been strongly influenced by 19th
   century German social theorist Max Weber. Weber considered market
   exchange, rather than production, as the defining feature of
   capitalism; capitalist enterprises, in contrast to their counterparts
   in prior modes of economic activity, was their rationalization of
   production, directed toward maximizing efficiency and productivity.
   According to Weber, workers in pre-capitalist economic institutions
   understood work in term of a personal relationship between master and
   journeyman in a guild, or between lord and peasant in a manor.

   In his book The Protestant Ethic and the Spirit of Capitalism
   (1904-1905), Weber sought to trace how capitalism transformed
   traditional modes of economic activity. For Weber, the 'spirit' of
   rational calculation eroded traditional restraints on capitalist
   exchange, and fostered the development of modern capitalism. This
   'spirit' was gradually codified by law; rendering wage-laborers legally
   'free' to sell work; encouraging the development of technology aimed at
   the organization of production on the basis of rational principles; and
   clarifying the separation of the public and private lives of workers,
   especially between the home and the workplace. Therefore, unlike Marx,
   Weber did not see capitalism as primarily the consequence of changes in
   the means of production. Instead, for Weber the origins of capitalism
   rested chiefly in the rise of a new entrepreneurial 'spirit' in the
   political and cultural realm. In the Protestant Ethic, Weber suggested
   that the origins of this 'spirit' was related to the rise of
   Protestantism, particularly Calvinism.

   Capitalism, for Weber, is the most advanced economic system ever
   developed over the course of human history. Weber associated capitalism
   with the advance of the business corporation, public credit, and the
   further advance of bureaucracy of the modern world. Although Weber
   defended capitalism against its socialist critics of the period, he saw
   its rationalizing tendencies as a possible threat to traditional
   cultural values and institutions, and a possible 'iron cage'
   constraining human freedom.

The German Historical School and the Austrian School

   From the perspective of the German Historical School, capitalism is
   primarily identified in terms of the organization of production for
   markets. Although this perspective shares similar theoretical roots
   with that of Weber, its emphasis on markets and money lends it
   different focus (Burnham). For followers of the German Historical
   School, the key shift from traditional modes of economic activity to
   capitalism involved the shift from medieval restrictions on credit and
   money to the modern monetary economy combined with an emphasis on the
   profit motive.
   Ludwig von Mises
   Enlarge
   Ludwig von Mises

   In the late 19th century the German historical school of economics
   diverged with the emerging Austrian School of economics, led at the
   time by Carl Menger. Later generations of followers of the Austrian
   School continued to be influential in Western economic thought through
   much of the 20th century. The Austrian economist Joseph Schumpeter, a
   forerunner of the Austrian School of economics, emphasized the "
   creative destruction" of capitalism—the fact that market economies
   undergo constant change. At any moment of time, posits Schumpeter,
   there are rising industries and declining industries. Schumpeter, and
   many contemporary economists influenced by his work, argue that
   resources should flow from the declining to the expanding industries
   for an economy to grow, but they recognized that sometimes resources
   are slow to withdraw from the declining industries because of various
   forms of institutional resistance to change.

   The Austrian economists Ludwig von Mises and Friedrich Hayek were among
   the leading defenders of market capitalism against 20th century
   proponents of socialist planned economies. Mises and Hayek argued that
   only market capitalism could manage a complex, modern economy. Since a
   modern economy produces such a large array of distinct goods and
   services, and consists of such a large array of consumers and
   enterprises, asserted Mises and Hayek, the information problems facing
   any other form of economic organization other than market capitalism
   would exceed its capacity to handle information. Thinkers within
   Supply-side economics built on the work of the Austrian School, and
   particular emphasize Say's Law: "supply creates its own demand."
   Capitalism, to this school, is defined by lack of state restraint on
   the decisions of producers.

   Austrian economics has been a major influence on the ideology of
   libertarianism, which considers laissez-faire capitalism to be the
   ideal economic system.

Keynesian economics

   John Maynard Keynes
   Enlarge
   John Maynard Keynes

   In his 1936 The General Theory of Employment, Interest, and Money, the
   British economist John Maynard Keynes argued that capitalism suffered a
   basic problem in its ability to recover from periods of slowdowns in
   investment. Keynes argued that a capitalist economy could remain in an
   indefinite equilibrium despite high unemployment. Essentially rejecting
   Say's law, he argued that some people may have a liquidity preference
   which would see them rather hold money than buy new goods or services,
   which therefore raised the prospect that the Great Depression would not
   end without what he termed in the General Theory "a somewhat
   comprehensive socialization of investment."

   Keynesian economics challenged the notion that laissez-faire capitalist
   economics could operate well on their own, without state intervention
   used to promote aggregate demand, fighting high unemployment and
   deflation of the sort seen during the 1930s. He and his followers
   recommended " pump-priming" the economy to avoid recession: cutting
   taxes, increasing government borrowing, and spending during an economic
   down-turn. This was to be accompanied by trying to control wages
   nationally partly through the use of inflation to cut real wages and to
   deter people from holding money. The premises of Keynes’s work have,
   however, since been challenged by neoclassical and supply-side
   economics and the Austrian School.

   Another challenge to Keynesian thinking came from his colleague Piero
   Sraffa, and subsequently from the Neo-Ricardian school that followed
   Sraffa. In Sraffa's highly-technical analysis, capitalism is defined by
   an entire system of social relations among both producers and
   consumers, but with a primary emphasis on the demands of production.
   According to Sraffa, the tendency of capital to seek its highest rate
   of profit causes a dynamic instability in social and economic
   relations.

Neoclassical economics and the Chicago School

   Today, most academic research on capitalism in the English-speaking
   world draws on neoclassical economic thought. It favors extensive
   market coordination and relatively neutral patterns of governmental
   market regulation aimed at maintaining property rights, rather than
   privileging particular social actors; deregulated labor markets;
   corporate governance dominated by financial owners of firms; and
   financial systems depending chiefly on capital market-based financing
   rather than state financing.

   The Chicago School of economics is best known for its free market
   advocacy and monetarist ideas. According to Milton Friedman and
   monetarists, market economies are inherently stable if left to
   themselves and depressions result only from government intervention.
   Friedman, for example, argued that the Great Depression was result of a
   contraction of the money supply, controlled by the Federal Reserve, and
   not by the lack of investment as Keynes had argued. Ben Bernanke,
   Chairman of the Federal Reserve, later acknowledged that Friedman was
   right to blame Federal Reserve for the Great Depression.

   Neoclassical economists, which today are the majority of economists,
   consider value to be subjective, varying from person to person and for
   the same person at different times, and thus reject the labor theory of
   value. Marginalism is the theory that economic value results from
   marginal utility and marginal cost (the marginal concepts). These
   economists see capitalists as earning profits by forgoing current
   consumption, by taking risks, and by organizing production.

History of capitalism

   Private ownership of some means of production has existed at least
   since the invention of agriculture. However, in feudal society much of
   this property was considered to be inalienable and so capital markets
   were not established. Some writers see medieval guilds as forerunners
   of the modern capitalist concern (especially through using apprentices
   as a kind of paid laborer); but economic activity was bound by customs
   and controls which, along with the rule of the aristocracy which would
   expropriate wealth through arbitrary fines, taxes and enforced loans,
   meant that profits were difficult to accumulate. By the 18th century,
   however, these barriers to profit were overcome and capitalism became
   the dominant economic system of much of the world.

   In the period between the late 15th century and the late 18th century
   the institution of private property was brought into existence in the
   full, legal meaning of the term. Important contribution to the theory
   of property is found in the work of John Locke, who argued that the
   right to private property is one of natural rights. Since the
   Industrial Revolution much of Europe underwent a thoroughgoing economic
   transformation associated with the rise of capitalism and levels of
   wealth and economic output in the Western world have risen
   dramatically.

   Over the course of the past five hundred years, capital has been
   accumulated by a variety of different methods, in a variety of scales,
   and associated with a great deal of variation in the concentration of
   economic power and wealth (Scott 2005). Much of the history of the past
   five hundred years is concerned with the development of capitalism in
   its various forms, its defense and its rejection, particularly by
   socialists.

Mercantilism

   A painting of a French seaport from 1638, at the height of
   mercantilism.
   Enlarge
   A painting of a French seaport from 1638, at the height of
   mercantilism.

   The earliest stages of modern capitalism, arising in the period between
   the 16th and 18th centuries, are commonly described as merchant
   capitalism and mercantilism (Burnham; EB). This period was associated
   with geographic discoveries by merchant overseas traders, especially
   from England and the Low Countries; the European colonization of the
   Americas; and the rapid growth in overseas trade. The associated rise
   of a bourgeoisie class eclipsed the prior feudal system.

   Mercantilism was a system of trade for profit, although commodities
   were still largely produced by non-capitalist production methods (Scott
   2005). Noting the various pre-capitalist features of mercantilism, Karl
   Polanyi argued that capitalism did not emerge until the establishment
   of free trade in Britain in the 1830s.

   Under mercantilism, European merchants, backed by state controls,
   subsidies, and monopolies, made most of their profits from the buying
   and selling of 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…" Similar practices of economic
   regimentation had begun earlier in the medieval towns. However, under
   mercantilism, given the contemporaneous rise of the absolutism, the
   state superseded the local guilds as the regulator of the economy.

   Among the major tenets of mercantilist theory was bullionism, a
   doctrine stressing the importance of accumulating precious metals.
   Mercantilists argued that a state should export more goods than it
   imported so that foreigners would have to pay the difference in
   precious metals. Mercantilists asserted that only raw materials that
   could not be extracted at home should be imported; and promoted
   government subsides, such as the granting of monopolies and protective
   tariffs, were necessary to encourage home production of manufactured
   goods.

   Proponents of mercantilism emphasized state power and overseas conquest
   as the principal aim of economic policy. If a state could not supply
   its own raw materials, according to the mercantilists, it should
   acquire colonies from which they could be extracted. Colonies
   constituted not only sources of supply for raw materials but also
   markets for finished products. Because it was not in the interests of
   the state to allow competition, held the mercantilists, colonies should
   be prevented from engaging in manufacturing and trading with foreign
   powers.

Industrial capitalism and laissez-faire

   The Bank of England is one of the oldest central banks. It was founded
   in 1694. and nationalised in 1946.
   Enlarge
   The Bank of England is one of the oldest central banks. It was founded
   in 1694. and nationalised in 1946.

   Mercantilism declined in Great Britain in the mid-18th century, when a
   new group of economic theorists, led by Adam Smith, challenged
   fundamental mercantilist doctrines as the belief that the amount of the
   world’s wealth remained constant and that a state could only increase
   its wealth at the expense of another state. However, in more
   undeveloped economies, such as Prussia and Russia, with their much
   younger manufacturing bases, mercantilism continued to find favour
   after other states had turned to newer doctrines.

   The mid-18th century gave rise to industrial capitalism, made possible
   by the accumulation of vast amounts of capital under the merchant phase
   of capitalism and its investment in machinery. Industrial capitalism,
   which Marx dated from the last third of the 18th century, marked the
   development of the factory system of manufacturing, characterized by a
   complex division of labor between and within work process and the
   routinization of work tasks; and finally established the global
   domination of the capitalist mode of production (Burnham).

   During the resulting Industrial Revolution, the industrialist replaced
   the merchant as a dominant actor in the capitalist system and affected
   the decline of the traditional handicraft skills of artisans, guilds,
   and journeymen. Also during this period, capitalism marked the
   transformation of relations between the British landowning gentry and
   peasants, giving rise to the production of cash crops for the market
   rather than for subsistence on a feudal manor. The surplus generated by
   the rise of commercial agriculture encouraged increased mechanization
   of agriculture.

   The rise of industrial capitalism was also associated with the decline
   of mercantilism. Mid- to late-nineteenth-century Britain is widely
   regarded as the classic case of laissez-faire capitalism (Burnham).
   Laissez-faire gained favour over mercantilism in Britain in the 1840s
   with the repeal of the Corn Laws and the Navigation Acts. In line with
   the teachings of the classical political economists, led by Adam Smith
   and David Ricardo, Britain embraced liberalism, encouraging competition
   and the development of a market economy.

Finance capitalism and monopoly capitalism

   In the late 19th century, the control and direction of large areas of
   industry came into the hands of financiers. This period has been
   defined as " finance capitalism," characterized by the subordination of
   process of production to the accumulation of money profits in a
   financial system. Major features of capitalism in this period included
   the establishment of huge industrial cartels or monopolies; the
   ownership and management of industry by financiers divorced from the
   production process; and the development of a complex system of banking,
   an equity market, and corporate holdings of capital through stock
   ownership. Increasingly, large industries and land became the subject
   of profit and loss by financial speculators.

   Late 19th and early 20th century capitalism has also been described as
   an era of " monopoly capitalism," marked by the movement from the
   laissez-faire phase of capitalism to the concentration of capital into
   large monopolistic or oligopolistic holdings by banks and financiers,
   and characterized by the growth of large corporations and a division of
   labor separating shareholders, owners, and managers (Scott 2005).

   By the last quarter of the 19th century, the emergence of large
   industrial trusts had provoked legislation in the U.S. to reduce the
   monopolistic tendencies of the period. Gradually, the U.S. federal
   government played a larger and larger role in passing antitrust laws
   and regulation of industrial standards for key industries of special
   public concern. By the end of the 19th century, economic depressions
   and boom and bust business cycles had become a recurring problem. In
   particular, the Long Depression of the 1870s and 1880s and the Great
   Depression of the 1930s affected almost the entire capitalist world,
   and generated discussion about capitalism’s long-term survival
   prospects. During 1930s, Marxist commentators often posited the
   possibility of capitalism’s decline or demise, often in alleged
   contrast to the ability of the Soviet Union to avoid suffering the
   effects of the global depression.

Capitalism following the Great Depression

   The economic recovery of the world's leading capitalist economies in
   the period following the end of the Great Depression and the Second
   World War — a period of unusually rapid growth by historical standards
   — eased discussion of capitalism's eventual decline or demise (Engerman
   2001).

   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. In 1929, for example, total U.S.
   government expenditures (federal, state, and local) amounted to less
   than one-tenth of GNP; from the 1970s they amounted to around one-third
   (EB). Similar increases were seen in all industrialized capitalist
   economies, some of which, such as France, have reached even higher
   ratios of government expenditures to GNP than the United States. These
   economies have since been widely described as " mixed economies."

   During the postwar boom, a broad array of new analytical tools in the
   social sciences were developed to explain the social and economic
   trends of the period, including the concepts of post-industrial society
   and welfare statism (Burnham). The phase of capitalism from the
   beginning of the postwar period through the 1970s has sometimes been
   described as “ state capitalism”, especially by Marxian thinkers.

   The long postwar boom ended in the 1970s, amid the economic crises
   experienced following the 1973 oil crisis. The “ stagflation” of the
   1970s led many economic commentators politicians to embrace neoliberal
   policy prescriptions inspired by the laissez-faire capitalism and
   classical liberalism of the 19th century, particularly under the
   influence of Friedrich Hayek and Milton Friedman. In particular,
   monetarism, a theoretical alternative to Keynesianism that is more
   compatible with laissez-faire, gained increasing support in the
   capitalist world, especially under the leadership of Ronald Reagan in
   the U.S. and Margaret Thatcher in the UK in the 1980s.

Globalization

   The New York Stock Exchange
   Enlarge
   The New York Stock Exchange

   Although overseas trade has been associated with the development of
   capitalism for over five hundred years, some thinkers argue that a
   number of trends associated with globalization have acted to increase
   the mobility of people and capital since the last quarter of the 20th
   century, combining to circumscribe the room to maneuver of states in
   choosing non-capitalist models of development. Today, these trends have
   bolstered the argument that capitalism should now be viewed as a truly
   world system (Burnham). However, other thinkers argue that
   globalization, even in its quantitative degree, is no greater now than
   during earlier periods of capitalist trade.

   After the abandonment of the Bretton Woods system and the strict state
   control of foreign exchange rates, the total value of transactions in
   foreign exchange was estimated to be at least twenty times greater than
   that of all foreign movements of goods and services (EB). The
   internationalization of finance, which some see as beyond the reach of
   state control, combined with the growing ease with which large
   corporations have been able to relocate their operations to low-wage
   states, has posed the question of the 'eclipse' of state sovereignty,
   arising from the growing 'globalization' of capital.

   Economic growth in the last half-century has been relatively strong.
   Life expectancy has almost doubled in the developing world since the
   postwar years and is starting to close the gap on the developed world
   where the improvement has been smaller. Infant mortality has decreased
   in every developing region of the world. Income inequality for the
   world as a whole is diminishing. Many other variables such as per
   capita food supplies, literacy, child labor, and access to clean water
   have also improved.

Political advocacy

Proponents of capitalism

   World's GDP per capita shows rapid acceleration since the beginning of
   the industrial revolution.
   Enlarge
   World's GDP per capita shows rapid acceleration since the beginning of
   the industrial revolution.

   Many theorists and policymakers in predominantly capitalist nations,
   have emphasized capitalism's 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 resource. Many theorists have noted that this increase in
   global GDP over time conincides with the emergence of the modern world
   capitalist system. While the measurements are not identical, proponents
   argue that increasing GDP (per capita) is empirically shown to bring
   about improved standards of living, such as better availability of
   food, housing, clothing, health care, reduction of working hours, and
   freedom from work for children and the elderly. Proponents also believe
   that a capitalist economy offers far more opportunities for individuals
   to raise their income through new professions or business venture than
   do other economic forms. To their thinking, this potential is much
   greater than in either traditional feudal or tribal societies or in
   socialist societies.

   Milton Friedman has argued that the " economic freedom" of competitive
   capitalism is a requsite of political freedom. Friedman argued that
   centralized control of economic activity was always accompanied with
   political repression. In his view, transactions in a market economy are
   voluntary, and wide diversity that vountary activity permits are
   fundamental threats to repressive political leaders. Friedman's view
   was also sheared by Friedrich Hayek and John Maynard Keynes|Keynes]
   both of whom believed that capitalism is vital for freedom to survive
   and thrive.

   Austrian School economists have aruged that capitalism can organize
   itself into a complex system without an external guidance or planning
   mechanism. Friedrich Hayek coined the term " catallaxy" to describe
   what he consisdered the phenomenon of self-organization underpinning
   capitalism. From this perspective, in process of self-organization, the
   profit motive has important role. From transactions between buyers and
   seller price system emerge, and prices serve as a signal on what are
   the urgent and unfilled wants of people. The promise of profits gives
   entrepreneurs incentive to use their knowledge and resources to satisfy
   those wants. In such way the activities of millions of people, each
   seeking his own interest, are coordinated.

   This decentralized system of coordination is viewed by some supporters
   of capitalism as one of its greatest strengths. They argue that it
   permits many solutions to be tried, and that real-world competition
   generally finds a good solution to emerging challenges. In contrast,
   they argue, central planning often selects inappropriate solutions as a
   result of faulty forecasting. However, in all existing modern
   economies, the state conducts some degree of centralized economic
   planning (using such tools as allowing the country's central bank to
   set base interest rates), ostensibly as an attempt to improve
   efficiency, attenuate cyclical volatility, and further particular
   social goals. Proponent who follow the Austrian School argue that even
   this limited control creates inefficiencies because we cannot predict
   the long-term activity of the economy. Milton Friedman, for example,
   has argued that the Great depression was caused by the erroneous policy
   by the Federal reserve.

Critics of capitalism

   An anti-capitalist poster printed by the Industrial Workers of the
   World in 1911.
   Enlarge
   An anti-capitalist poster printed by the Industrial Workers of the
   World in 1911.

   Capitalism has met with strong opposition throughout its history,
   largely from the left, but also from the right; and from religious
   elements. Many 19th century conservatives were among the most strident
   critics of capitalism, seeing market exchange and commodity production
   as threats to cultural and religious traditions.

   Prominent leftist critics have included socialists and anarchists, such
   as Karl Marx, Pierre-Joseph Proudhon, Mikhail Bakunin, Franz Fanon,
   Vladimir Lenin, Leon Trotsky, Peter Kropotkin, Mao Zedong, Noam
   Chomsky, and others. Movements like the Luddites, Narodniks, Shakers,
   Utopian Socialists and others have opposed capitalism for various
   reasons. Marxism has influenced the creation of social democratic and
   labour parties, which seek change through existing democratic channels
   instead of revolution. These parties believe that capitalism should be
   heavily regulated instead of abolished. Many aspects of capitalism have
   come under attack from the relatively recent anti-globalization
   movement.

   Some religions criticize or outright oppose specific elements of
   capitalism. Some traditions of Judaism, Christianity, and Islam forbid
   lending money at interest, although methods of Islamic banking have
   been developed. Christianity has been the source of many criticisms of
   capitalism, particularly its materialist aspects. The first socialists
   drew many of their principles from Christian values (see Christian
   socialism), against the " bourgeois" values of profiteering, greed,
   selfishness and hoarding. Many Christians do not oppose capitalism
   entirely, but support a mixed economy in order to ensure adequate
   labour standards and relations, as well as economic justice. There are
   many Protestant denominations (particularly in the United States) who
   have reconciled with — or are ardently in favour of — capitalism,
   particularly in opposition to secular socialism.

   Some problems claimed to be associated with capitalism include: unfair
   and inefficient distribution of wealth and power; a tendency toward
   market monopoly or oligopoly (and government by oligarchy);
   imperialism, various forms of economic exploitation; and phenomena such
   as social alienation, inequality, unemployment, and economic
   instability. Near the start of the 20th century, Vladimir Lenin claimed
   that state use of military power to defend capitalist interests abroad
   was an inevitable corollary of monopoly capitalism. Some
   environmentalists claim that capitalism requires continual economic
   growth, and will invevitably deplete the finite natural resources of
   the earth, and other resources utilized broadly. Some
   environmentalists, such as Murray Bookchin, have argued that capitalist
   production passes on environmental costs to all of society, and is
   unable to consider its impact upon ecosystems and the biosphere at
   large (see externality and social cost).

Democracy, the state and legal frameworks

   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 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. This is the process
   which transforms physical assets into capital which may be then be used
   in many more ways and much more efficiently in the economy. A number of
   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 developement of capitalism.

   Many theorist of capitalism say that capitalism needs a legal framework
   for optimal function, and that monopoly, pollution and other perceived
   market failures can be prevented by regulations, such as different tax
   and welfare policies. Today, almost all developed nations have such
   regulations, although the desirable degree is still debated.

   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 become 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 (Burnham). 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 argue that capitalist democracies
   rarely make war with one another and have little internal violence.

   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. Some
   peer-reviewed studies find evidence for causation.
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