Capitalism: A Short History

By Jürgen Kocka

In work poverty hits record high

The international financial and debt crisis that started in 2008 has added fuel to the fire of critical interest in capitalism.

The term capitalism only gained acceptance in French, German, and English in the second half of the nineteenth century.

Although Karl Marx rarely used the noun “capitalism,” in the 1850s and 1860s he wrote profusely and effectively about the “capitalist mode of production.”

In 1902 Werner Sombart’s great work Modern Capitalism was published, a book that contributed decisively to making the term part of the vernacular.

In Great Britain, as early as 1851, the concept was not entirely unknown. But starting in the 1880s, it was reluctantly introduced to a wider public, especially in Fabian circles.

The Encyclopaedia Britannica first mentioned the concept in its 1910–1911 edition.

Only in the light of a sometimes transfigured memory of a different past, or of a better future envisioned as a socialist alternative, did the concept of capitalism emerge.

In the late nineteenth and early twentieth centuries, numerous intellectuals regarded capitalism as the decisive contemporary feature of their era.

The following pages explore somewhat more comprehensively three thinkers whose now classic statements have shaped the discussion and definition of “capitalism” to this day: Karl Marx, Max Weber, and Joseph A. Schumpeter.

The main components of the Marxist concept of capitalism may be summarized in four points.

Critiques of the Marxist conception are legion. With good reason, he has been accused of having underestimated the civilizing impact of markets while overestimating labor as the only source of newly created value.

Marxist analysis remains an original, fascinating, and fundamental framework, a point of reference to this day for most subsequent interpreters of capitalism, no matter how much they may criticize Marx.

Max Weber treated the subject of capitalism as part of a comprehensive history of occidental modernization.

Unlike Marx, he did not expect capitalism to be destroyed by its own crises; rather, he feared the danger of petrification owing to an excess of organization and bureaucratization.

He did not believe in the superiority of a future socialist system.

Above all, Weber was interested in modern capitalism, which was characterized by “formal, calculative rationality.”

He convincingly demonstrated how much the rise of capitalism across the centuries depended on extra-economic factors—especially on politics and law, on states, their wars, and their financial needs.

His analyses are among the best that have ever been written about capitalism.

Joseph A. Schumpeter not only used the term capitalism in his own research, but he also deeply influenced the scholarly discussion with his book Capitalism, Socialism and Democracy.

By emphasizing the extension of credit and thereby the incursion of debt, Schumpeter makes a contribution that, after finance capitalism’s disproportionate growth over the last several decades, is very topical today.

He was searching for the mechanism by which the economy changed of its own accord. He found this in innovation.

In this context, he spoke of “creative destruction” as the core of capitalist development.

He was convinced that capitalism had brought to not just a small minority but the broad majority of the population a degree of material well-being and personal freedom that was unique in human history.

Schumpeter’s work lives on among his followers and opponents. It is irreplaceable for the history of capitalism.

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With the growing receptiveness of historical scholarship to global history that has taken place over the last two decades, capitalism is increasingly discussed as a phenomenon of global history.

The definitions of capitalism that have largely been coined in Europe and North America could be subject to change over the long run.

I propose a working definition of capitalism that emphasizes decentralization, commodification, and accumulation as basic characteristics.

In order to speak of a full-fledged “capitalist economy” or a “capitalist system,” capitalist principles do need to have a certain dominance.

For the early centuries of merchant capitalism, I look at China, Arabia, and parts of Europe.

In the breakthrough phase of around 1500 to around 1800, Europe moves into the center of the account.

In the nineteenth and twentieth centuries, attention shifts to the rise of finance capitalism, which will primarily be illustrated with European, North American, and some Japanese examples.

Capitalism’s accelerated globalization in the second half of the twentieth century and at the beginning of the twenty-first requires a look beyond the West,

There are different answers to the question of when capitalism began.

One sometimes hesitates to call the economy of Greco-Roman antiquity capitalist.

In the last two centuries of the first millennium, the rudiments of a merchant capitalist bourgeoisie emerged in some parts of Arabia, more clearly here than anywhere else in the world at that time.

Capitalism developed relatively late in medieval Europe.

Between the twelfth and fifteenth centuries, trade between Europe and Asia extended.

For a long time, this trade was managed by shipowners, merchants, and ship captains from Venice, Genoa, and somewhat later Florence.

Business on the basis of advance payments and credits had already become the rule in Venice as early as the twelfth century.

The formation of enterprises represents a development in medieval merchant capitalism from the thirteenth century onward, and especially during the fourteenth and fifteenth centuries, that can hardly be overerestimated.

The Great Ravensburg Trading Company was supported by more than a hundred families and existed for 150 years (1380–1530).

Double-entry bookkeeping was known in northern Italian trading cities by the fourteenth century.

New methods were created for handling cashless lending, dealing in promissory notes, and futures trading.

Different legal forms for shareholding, partnership, and capital consolidation were developed, and these rudimentary innovations facilitated capital shares with limited liability.

Banks emerged in Genoa starting in the twelfth century.

It became apparent early on that the social explosiveness of capitalism increased as soon as it began to expand from the sphere of circulation to the sphere of production and to reshape the world of work directly.

In contrast to the more fully developed capitalism that would come later, the fixed capital tied up in trade remained limited by nature, and capital accumulation happened neither quickly nor in unlimited fashion.

In the millennium between 500 and 1500, merchant capitalism was a global and not a specifically European phenomenon.

In the comparative perspective of global history, Europe was a latecomer that remained backward for a long time as far as the formation of the institutions of capitalism and its behaviors is concerned.

It was Europe that learned and adopted more from the others than the other way around.

What proved decisive was the relationship between the economy and the state, between market processes and political power.

Politics in Europe was decisive for promoting mercantile dynamism and a capitalistic kind of accumulation.

Until around 1500, capitalism was rather limited overall. In the following three centuries, however, a fundamental broadening of capitalism took place and became important for society as a whole, especially in the Netherlands and England.

In this phase, which from a European perspective is regarded as the early modern era, western Europe clearly became the leading region in the history of capitalism.

The rise of capitalism, the development of powerful territorial states, and the expansion of Europe that led to colonialism were all contingent on each other.

What is often euphemistically called the Age of Discovery was in reality an age of subjugation, part violent and part commercial, of a large part of the world by European powers.

The English after numerous wars with the Spanish and French in the eighteenth century, vaulted to the position of leading colonial power.

Around 1500, European powers controlled about 7 percent of the world’s territory, but by 1775 this was 35 percent.

Operating at the heart of the European expansion into the world we see an irritating amalgamation of trade and warfare, an aggressive jumble of lust for power, capitalist dynamism, and lawless violence.This mix keeps cropping up, even in the present.

A new world trade system emerged, with western Europe as its center.

The leading regions of capitalist development inside Europe wandered, initially from northern Italy, southern Germany, and the Baltic–North Sea region to the Netherlands, and then to England.

It was no longer Genoa and Florence, Augsburg and Lübeck, but increasingly Antwerp, then Amsterdam, and finally London that became centers of the world economy.

New types of institutions and practices of finance capitalism emerged that are active to this day. For example, there have been stock exchanges trading in securities in Antwerp since 1531, in Amsterdam since 1611–1612, and in London since 1698.

Via the stock market and speculation, entire classes of society got their first introduction to the gains and losses, that capitalism so abundantly held in store for them.

What proved decisive was how public debt was regulated in the long run.

The Dutch and English succeeded in consolidating the public debt, for which the financially potent population groups politically enfranchised in the Netherlands and England, were answerable.

The creditworthiness and economic power of the Netherlands and England grew considerably.

The Netherlands succeeded in continuing to play a key role in banking and finance for Europe.

An ingredient in the successful renewal of public finances in England was the creation in 1694 of the Bank of England, which made an important contribution to state formation and to the further development of capitalism as well.

Almost all elements of financial apparatus that we’ve come to associate with capitalism came into being not only before the science of economics but also before the rise of factories, and wage labor itself.

With respect to the Netherlands and England, we may speak of a fully developed capitalist way of doing business that had powerful social and cultural impact as early as the seventeenth and eighteen centuries.

The interpretation of emerging capitalism offered by Smith and other Enlightenment figures of the eighteenth century, as a path to greater prosperity and greater social progress, blanked out some of capitalism’s weaknesses or ascribed them to institutions still in need of reform.

The Enlightenment reading of capitalism overlooked the elements of force that played an important role in its implementation, as in the privatization of common land and the concomitant loss of a livelihood experienced by sections of the rural population.

At our current state of knowledge, it is evident that, around 1800, capitalism in a form going beyond merchant capitalism and with systemic force was a European phenomenon, yet fully expressed only in northwestern Europe, however much it had been simultaneously facilitated and codetermined by global linkages.

Just as unlikely as it was that the Age of Enlightenment’s optimism about progress could be sustained, equally slim were the chances that interpreting capitalism as the core of a civilizing mission might outlast that era.

At the beginning of the twentieth century, intellectuals like Werner Sombart and Max Weber were indeed convinced of capitalism’s superior economic rationality, but they did not see it as a driving force behind moral advancement and progress in civilization. On the contrary.

Conservatives and leftists alike feared capitalism as an unstoppable erosive force replacing traditional morals with contracts, community with society, and social ties with market calculation.

Today attitudes toward capitalism fluctuate between acceptance and severe criticism. Many regard it as unfit to meet the challenges of the future.

What was truly revolutionary and novel after 1800 was industrialization, a process that, among other things, profoundly altered capitalism.

Most of all it led a fundamental improvement of living conditions that could be seen by looking at real income gains.

Although one cannot regard industrialization as the only path to prosperity, the prosperity gap between industrialized and nonindustrialized regions has grown enormously over the last two hundred years, some authors have referred to industrialization as the most fundamental transformation of human life in the history of the world.

Industrialization has been extremely well researched. What is its connection to capitalism?

There obviously was (and is) a pronounced affinity between capitalism and industrialization: for both, investments are of decisive importance.

A decentralized structure that disperses decision-making among many different enterprises has proven indispensable.

Capitalism in its developed form had been confined to a few regions in northwestern Europe prior to 1800.

The kind of capitalism dynamized by industrialization took on global dimensions in the nineteenth century, and particularly in the twentieth.

Yet from the 1860s through 1914, and again since the 1970s, but especially since 1990, there have been phases where globalization accelerated significantly.

There emerged highly complex, systematically structured, elaborately coordinated megastructures with managerial personnel who were, increasingly, academically certified. Overall, this was a profound change of form for capitalism.

It was hoped that managerial capitalism, owing to the dispersion of ownership, would produce a bit of democratization.

It has tied life for the multitude even more clearly than before to the ups and downs of capitalist business.

The classical era of managerial capitalism in the West, lasted through the 1970s and 1980s.

The tendency to detach economic action from social contexts reached new heights with the arrival of “financialization,” the rise of what can be called financial market capitalism, finance capitalism, or investor capitalism.

The “neoliberal” policy of deregulation that started in England and the United States but soon took effect internationally contributed greatly to this trend, as it did to the exorbitant rise of profits for bankers.

The morals of solid banking, together with trust in institutions, were lost.

The inclination to indebtedness has grown exorbitantly in many countries and sectors.

We are dealing with a lasting source of destabilization for capitalism in the age of its financialization, with an unresolved crisis and a fundamental problem of culture and politics in the relatively affluent countries of the present time.

The international financial crisis of 2008 conspicuously demonstrated work directlywhat self-destructive and all-around dangerous potentials lurk inside the dynamic of the new investor capitalism when left to the banks, investors, stockbrokers, and other “money managers.”

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Only in the nineteenth and twentieth centuries did fully developed wage labor start to become an overwhelming mass phenomenon, especially in the West.

It was above all in and by way of industrial factories and mining that wage labor became a mass phenomenon.

Developments in the history of wage labor whose future is hard to predict merit special mention.

Every third person in 2013 was working either part time, temporarily, on subcontract, or in a mini-job.

The workplace is losing the clear contours that it first acquired in the nineteenth century.

Making employment conditions more flexible and work more fragmented will lead to a perilous erosion of individual identities and of social cohesion.

The binding force of work, its power to shape structures of social welfare, create cultural ties, and socialize individuals have diminished.

In Western Europe, labor has long since ceased to hold the central place in the critique of capitalism it once occupied.

This trend, like financialization, results from the increasingly pervasive application of the dominant principles of the market to ever more areas of economy and society under conditions of digitalized worldwide communication.

Since the end of the 1970s, the United Kingdom became the country pioneering this change of course. But the zeitgeist had also changed, away from organization and solidarity as leading values, and toward individualization and appreciating diversity and spontaneity.

The collapse of the Eastern bloc removed the great challenge of a noncapitalist alternative.

The crisis has profoundly shaken the foundations of neoliberalism’s legitimation, both political and intellectual.

The financial market crisis of capitalism was transformed into a public debt crisis, with damaging consequences whose end is not yet in sight, especially in Europe.

The self-disenchantment of the neoliberal myth about the market’s self-healing powers could not have been more thoroughgoing.

State interventions have been indispensable for the emergence, expansion, and survival of capitalism.

Capitalism, even in its advanced stages, develops in a way that has disruptive and destructive effects on its social, cultural, and political environment and can call into question its social acceptance.

Historical experiences show that the destabilizing social consequences of capitalism can at least be alleviated by governmental measures if a body politic is strong enough and capable of mobilizing such measures.

The rise of the welfare state since the late nineteenth century is the best example of how this works.

Thus far, all alternatives to capitalism have proven inferior, both with respect to the creation of prosperity and the facilitation of freedom.

The “labor question” has ceased to divide society in the more affluentparts of the world, even if it can be rediscovered at the global level.

It seems as if capitalism is capable of just enough change, so that a good bit of the critique comes to naught.

The contemporary critique of growing inequality as a consequence of capitalism is becoming ever more urgent.

Similar in the way it poses fundamental questions is the critique of capitalism’s constitutive dependence on permanent growth and constant expansion that threatens to destroy natural resources and cultural resources.

The discrepancy between the claim of democratic politics to shape and communicate universalized values, on the one hand, and the dynamic of capitalism that evades democratic politics, on the other, remains an enduring problem.

Capitalism can be influenced by political means and those of civil society when and if these are strong and decisive enough.

The reform of capitalism is a permanent task. In this, the critique of capitalism plays a central role.

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