Capitalism is an economic system in which trade, industry, and the means of production are largely or entirely privately owned and operated for profit. Central characteristics of capitalism include capital accumulation, competitive markets, and wage labor. In a capitalist economy, the parties to a transaction typically determine the prices at which assets, goods, and services are exchanged.
The production of goods and services is based on supply and demand in the general market (market economy), rather than through central planning (planned economy). Capitalism is generally characterized by competition between producers. Other facts, such as the participation of government in production and regulation, vary across models of capitalism.
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The degree of competition, the role of intervention and regulation, and scope of public ownership varies across different models of capitalism. Economists, political economists, and historians have taken different perspectives in their analysis of capitalism and recognized various forms of it in practice.
Capitalism has existed under many forms of government, in many different times, places, and cultures. Following the demise of feudalism, capitalism became the dominant economic system in the Western world.
Capitalism was carried across the world by broader processes of globalization such as imperialism and, by the end of the nineteenth century, became the dominant global economic system, in turn intensifying processes of economic and other globalization.
The British East India Company and the Dutch East India Company inaugurated an expansive era of commerce and trade. These companies were characterized by their colonial and expansionary powers given to them by nation-states. During this era, merchants, who had traded under the previous stage of mercantilism, invested capital in the East India Companies and other colonies, seeking a return on investment.
The recognition of individual rights entails the banishment of physical force from human relationships: basically, rights can be violated only by means of force. In a capitalist society, no man or group may initiate the use of physical force against others . The only function of the government, in such a society, is the task of protecting man’s rights, i.e., the task of protecting him from physical force; the government acts as the agent of man’s right of self-defense, and may use force only in retaliation and only against those who initiate its use; thus the government is the means of placing the retaliatory use of force under objective control.
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Capitalism rose to prominence with the end of feudal economies and has become the dominant economic system in developed countries. Specific tenets of capitalism, such as property rights and wage labor, can also be considered cornerstones of representative government.
Capitalism is often closely associated with economic growth, as production and price are determined by the market rather than by governments. Private property rights provide individuals with the freedom to produce goods and services they can sell in the market.
Capitalism has been criticized for its underlying focus on profit, and how that focus can lead to social and economic inequality. Further, it is also criticized for its emphasis on consumption, as the constant purchase of goods and services is necessary for capitalism’s success.
Capitalism has been dominant in the Western world since the end of mercantilism. It was fostered by the Reformation, which sanctioned hard work and frugality, and by the rise of industry during the Industrial Revolution, especially the English textile industry (16th–18th centuries). Unlike earlier systems, capitalism used the excess of production over consumption to enlarge productive capacity rather than investing it in economically unproductive enterprises such as palaces or cathedrals.
The strong national states of the mercantilist era provided the social conditions, such as uniform monetary systems and legal codes, necessary for the rise of capitalism. The ideology of classical capitalism was expressed in Adam Smith’s Wealth of Nations (1776), and Smith’s free-market theories were widely adopted in the 19th century. In the 20th century the Great Depression effectively ended Laissez – Faire economics in most countries, but the demise of the state-run Command Economies of Eastern Europe and the former Soviet Union and the adoption of some free-market principles in China left capitalism unrivaled by the beginning of the 21st century.
Critics of capitalism associate the economic system with social inequality; unfair distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism; counter-revolutionary wars; various forms of economic and cultural exploitation; materialism; repression of workers and trade unionists; social alienation; economic inequality; unemployment; and economic instability.
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