16.1B: Capitalism

Capitalism is a system that includes private ownership of the means of production, creation of goods for profit, competitive markets, etc.

Learning Objectives

• Examine the different views on capitalism (economical, political and historical) and the impact of capitalism on democracy

Key Points

• Economists usually focus on the degree that government does not have control over markets (laissez-faire), and on property rights.
• Most political economists emphasize private property, power relations, wage labor, and class and emphasize capitalism as a unique historical formation.
• Market failure occurs when an externality is present and a market will either under-produce a product with a positive externalization or overproduce a product that generates a negative externalization.
• The extension of universal adult male suffrage in 19th century Britain occurred 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—claiming that one affects the other.

Key Terms

• wage labor: The socioeconomic relationship between a worker and an employer, where the worker sells their labor under a formal or informal employment contract.
• voluntary exchange: Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transactions. Moreover, transactions are made in such a way that both the buyer and the seller are better off after the exchange than before it occurred.
• externality: In economics, an externality, or transaction spillover, is a cost or benefit that is not transmitted through prices and is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit.

Capitalism is generally considered by scholars to be an economic system that includes private ownership of the means of production, creation of goods or services for profit or income, the accumulation of capital, competitive markets, voluntary exchange, and wage labor. The designation is applied to a variety of historical cases, which vary in time, geography, politics, and culture.

Economists, political economists and historians have taken different perspectives on the analysis of capitalism. Economists usually focus on the degree that government does not have control over markets (laissez-faire economics), and on property rights. Most political economists emphasize private property, power relations, wage labor, class and capitalism’s as a unique historical formation. Capitalism is generally viewed as encouraging economic growth. The differing extents to which different markets are free, as well as the rules defining private property, are a matter of politics and policy, and many states have what are termed mixed economies. A number of political ideologies have emerged in support of various types of capitalism, the most prominent being economic liberalism.

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 19^th 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.

The relationship between democracy and capitalism is a contentious area in theory and popular political movements. The extension of universal adult male suffrage in 19^th 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—claiming each affects the other. However, in the 20^th century, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist regimes, absolute monarchies, and single-party states.