Introducing Capitalism: A Graphic Guide
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Capitalism is the name of a family of economic systems based on the private ownership of the means of production and trading goods for profit. Capitalist economies tend to be characterized by free competition and industrialization, although capitalism without industry is not a contradiction in terms. Broadly speaking, capitalist systems give a central role to the accumulation of resources that can be used for further production. These resources, known as “capital”, give capitalism its name.
As capitalism is an economic system based on trade, private ownership, and currency, its development is bound up with the history of trade and banking.
The food-supplying landowners became the nobility. The feudal economic system they constructed was based on a careful balance between small land units and a stable level of production. Feudalism aims for stability, and this makes it diametrically opposed to capitalism with its search for ever-growing markets.
The rise of trade and banking in 14th-century Europe eventually became the Renaissance, which was supported by bankers made princes like the Medici.
The first commercial banks appeared in the late 13th century in Italian towns like Siena.
But banking does not begin with the Italian merchants – its origins lie with the Knights Templar, an order of warrior monks founded in 1096 to ensure the safe passage of European pilgrims heading to Jerusalem in the aftermath of the First Crusade.
The Templars got immensely rich during the heyday of the Crusades.
The order was dissolved in 1314, its leaders were put to the stake, and its wealth confiscated and divided up.
Banking lived on and developed mainly in Italy by private hands, but its basic idea remained unchanged from the days of the Templars to the arrival of the Rothschilds in the 19th century.
By the end of the 15th century, improvements in the design of ships and inventions like the clock and the compass meant that crossing the ocean became feasible.
From the 16th century onwards, international trade offered prospects of wealth far superior to the grain produced by the small feudal fiefs of Europe. With the arrival of that wealth, the feudal system faded away and was replaced by what came to be known later as a mercantile economy.
The transition to a mercantile economy also played a major role in the formation of the modern state out of the loose array of feudal estates.
While a powerful, centralized monarchy created the first great European empires, it held back the development of a strong and independent merchant class, and that held back private enterprise. As a result, capitalism did not grow out of the empires of Spain and Portugal, but out of the disadvantaged newcomers to the race for international trade, and especially England and the Netherlands.
The Netherlands is a small nation but its contribution to the development of capitalism is immense.
Amsterdam itself was the greatest trade city in Europe up to the Industrial Revolution, and was home to the first stock exchange and insurance company. The Netherlands is considered by many historians to be the first truly capitalist nation in the world.
As things stood in the second half of the 16th century, the English crown had nothing to lose by encouraging private ship-owners to make a living out of pirating the slow and heavy Spanish merchant ships returning from South America laden with gold and silver.
Elizabeth I had founded the British East India Company by royal charter in 1600. During the time of her successor James I, England became well used to private companies financing government-sanctioned projects. With the Virginia Company (founded in 1606), James used private investment and the gap in hostilities with Spain to start Jamestown, Britain’s first lasting colony in North America
The first major thinker to put these new ideas down on paper was Thomas Hobbes (1588–1679). Hobbes was basically the first great capitalist philosopher. Unlike many of the political thinkers who came before him – who looked at questions like “What is justice?” or “Who should rule?” – Hobbes put the individual at the centre of political theory
An individual’s power is determined by many things such as their strength, intelligence, or social standing.
It makes no sense to speak of the value of man like this unless it is possible for a man to trade his power, or work, for money. So it is that even before he got to analysing the state and how it should be structured, Hobbes thought of man in a capitalist framework.
Hobbes became controversial in his 50s. In 1640 the political climate in England was tense, as the country edged towards civil war. It was then that Hobbes published a book on the necessity of a strong ruler.
He survived Cromwell and was given a pension from Charles II when the monarchy was restored in 1660, only to find himself accused of heresy and banned from printing anything else on politics. He died in 1679 at the age of 90.
Where Hobbes granted man control of his own labour, Locke went further, giving people the right to the fruits of their labour. He started from the idea that in the state of nature everything is commonly owned by all mankind, and asked how the ownership of private property.
Locke’s question is of fundamental importance to the moral justification of capitalism. If private property cannot be justified, then nor can trade or investment, as they are dependent on the idea that a person can own property and can, within reason, do with it what they want.
Locke thought that the thing that allows us to claim part of nature as our own is that we have somehow worked on it – in Locke’s words, that we have “mixed our labour” with it.
The idea that people have natural rights to private property and to decide how and where they work became the bedrock of liberal capitalism. In liberal thought, if a person has a natural right to something, then no one, not even the state, can interfere with it.
Not only did Locke try to come up with an account of the justification for private property, he also proposed a structure for society that lends itself to capitalism. For Locke, the role of “civil government” is to protect the freedom and security of all members of society.
Like many of his contemporaries, Locke identified wealth with money – and specifically with reserves of gold.
From this it followed that the goal of a nation’s political economy should be to hoard things like gold (at the time, money was made from precious metals). This idea found its most famous critic in a Scotsman, Adam Smith (1723–90), and his book, the Wealth of Nations (1776).
Smith believed that the best way to promote trade was to trust to the self-interest and inventiveness of individual traders.
The self-correcting nature of the market led Smith to think that we could trust the market to provide what was needed – and the principal obstacle to the market trading freely and fulfilling our needs was government intervention.
Smith went further, saying that the value of a thing consists in the amount of labour one could get in exchange for it. Labour was the key ingredient in the cost of production of a thing, which determined its value, or at least the minimum price that would make its production profitable.
This idea became known as the Labour Theory of Value, and was the bedrock of “classical” economics.
It led Smith to agree with Hobbes’ phrase “wealth is power” – not because wealth automatically gives its owner political power, but because it gives him or her control of other people’s labour.
Smith believed that economic growth stems from specialization.
Smith thought that specialization and efficiency of production was the very mark of progress.
As a believer in free trade, Smith was opposed to the tariffs and restrictions that Britain was putting on many of the colonies of its burgeoning empire.
Smith is generally considered to be the father of modern economics, though the Wealth of Nations is not wholly original.
By the time Smith died in 1790, the British were dominating international trade and the Industrial Revolution had just kicked off in Britain.
Meanwhile, in the Jewish ghetto of Frankfurt-am-Main, Mayer Rothschild (1744–1812) and his sons had begun building the now famous finance house. What made their business unique was that Rothschild sent his five sons to open branches in the five busiest cities in Europe.
The Rothschilds developed the very idea of the international investment bank – they could transfer their funds wherever there was peace and prosperity, and thus enjoy high interest on their investments no matter what the situation was. Importantly, they were happy to fund private and government ventures by lending money. These two factors made them a financial machine of a completely new sort. Industrialization finally drove the West out of a mercantile economy and into a capitalist one. Before industrialization, the most important factor in determining the wealth of a country was its volume of trade, or exports minus imports. After industrialization, the value of what a country could produce became more important.
By the last decades of the 19th century, most of the world was under direct European control. Britain alone controlled almost a fifth of the world.
At the end of the second Opium War (in which it was joined by France), Britain forced the Chinese to fully legalize both the trade in opium and the shipment of Chinese indentured labourers to the Americas (where they worked as slaves in all but name).
The boom in industry also meant that science was finally getting the respect it was looking for from all angles of society.
Sociology, psychology and economics began to look more and more like scientific disciplines.
Smith’s Wealth of Nations formed the backbone of this new science of economics, but his definitions, concepts and claims were phrased more rigorously, formulated mathematically, and supplemented by empirical data analysed statistically.
The most influential of the first scientific formulations of what came to be known as “classical” economics was made by David Ricardo (1772–1823), in his Principles of Political Economy and Taxation, published in 1817.
For Ricardo, differences in rent charged by landowners are due to differences in the productivity of different regions – whether we’re talking about more fertile grounds for agriculture, or regions rich in vital industrial resources like coal.
So the more productive a region becomes, the higher the rent will get and the wealthier the landowners. On the other hand, the more productive a region gets, the more capital it produces, so the capitalists will get richer too.
Ricardo’s second principle is that labour is destined never to become more expensive. From the Labour Theory of Value it follows that all increases in productivity and profit principally happen because labour got cheaper.
So the rate at which wages increase will tend to be the same as the rate of inflation – nominal but never real, in economic terms.
This grim result for the workers was presented by Ricardo as a problem to be dealt with.
The best that workers can hope for is a condition of full employment, and that can be achieved only by increasing production at a rate matching the growth of the population. This solution, however, was not enough for the most prominent thinker of classical liberal ideology – John Stuart Mill (1806–73).
Utilitarianism gradually became the dominant worldview of modern liberal politics and capitalist economics.
This was the basis behind Bentham’s liberal politics, which aimed to minimize state intervention in private affairs, including the economy.
One central “radical” idea they had was that everyone should have the vote, including women and the poor, an idea for which Bentham was scornfully booed out of Parliament.
Mill saw the state and the market as instruments designed to serve the individual, and ultimately to increase the happiness of all.
The main economic instrument of the state is taxation. Deciding who, what and how much to tax could be a decisive factor in the way wealth is distributed throughout the population. Mill thought that taxation should be the means to publicly fund education, health, legal aid and basic living conditions for all citizens. To this day, this is a landmark of liberal economics and politics.
Mill paved the way beyond the Labour Theory of Value and towards the Supply and Demand theory that replaced it, and which is still prevalent in economic theory today
Mill continued the Utilitarian tradition, presenting a humane form of capitalism and supporting private interest because it was supposed to benefit the general good – even though industrialization made living conditions a lot worse for the great majority of the population.
Without any legal limit on working hours or minimum wages, the working day lasted for sixteen hours and the pay sufficed for only the most meager existence. Trade unions began to form, but they could do little as long as labour was unskilled and each worker immediately replaceable by another.
Conditions were similar throughout the industrializing world. In Ireland, the Great Famine of 1845–50 was exacerbated by the British government’s insistence on a hands-off approach to managing the economy, with the result that, despite horrendous conditions, Ireland was a net exporter of food during the years of the great hunger.
Mill found that his liberal response to these conditions convinced only a minority in Parliament, which prior to the Reform Act of 1867 represented mainly the gentry and the rich.
With the government all but deaf to the pleas of the majority of the population, reform and protest movements sprung up outside Parliament. The first of these was led by Robert Owen (1771–1858), a self-made man who earned his fortune in the textile industry.
Owen is sometimes considered a founder of socialism, but what he was offering was really a kind of conscientious capitalism, and he never supported giving political power to the working class.
Nevertheless, Owen’s ideas did have a lasting effect, feeding into perhaps the greatest reform movement in Britain until the Suffragettes – the loose coalition known as The Chartists.
After its third petition was ignored by Parliament in 1848, the movement quickly deteriorated. But its cause was kept alive by a growing number of MPs, especially after the Liberal Party was officially formed in 1859. To avoid losing power completely, it was the Conservatives who eventually accepted almost all the Chartists’ demands in the Reform Act of 1867.
However, by the time of the Reform Act, a bigger challenge to capitalism had evolved in Europe – socialism. Socialism is basically a call for greater equality in political power and the distribution of goods. It managed to rally much of the working class behind it.
The two most influential thinkers in early socialism are probably Claude-Henri de Saint-Simon (1760–1825) and Mikhail Bakunin (1814–76).
It was really his ability to gather some of the great minds of his day around him that has made Saint-Simon famous. His students turned the school of Saint-Simonism into the leading socialist movement in France.
Saint-Simonism highlights one significant aspect of socialism – the social control of the means of production. Socialism calls for what it considers a more rational way of distribution – taking into account the general benefit and not the personal interest of any single party. This is diametrically opposed to the liberal capitalist view that private ownership results in the most rational market.
Bakunin, on the other hand, represents the more revolutionary concerns of socialism, and its mistrust of states and control altogether. He believed that states and government are simply means of exploiting the working class. As such, the workers should not seek political power. Rather, they should aim for the abolition of the state, as its continued existence can be used only to subjugate them to the ruling class. This makes Bakunin one of the fathers of anarchism as much as socialism.
However, these thinkers and other early socialists were all surpassed by the work of Karl Marx (1818–83), the thinker whose name became almost synonymous with extreme socialism.
Moreover, said Marx, they had no idea how capitalism worked, how it came about, and what it must lead to. They still thought within the outdated framework of the social contract thinkers like Hobbes and Locke, imagining that people can just design a society as they see fit.
He presented his view as “Scientific Socialism”, a socialism that follows as a scientific conclusion. The theoretical framework he used for this purpose relied heavily on the philosophy of Georg Wilhelm Friedrich Hegel (1770–1831).
Hegelian history proceeds according to rules of its own. Specifically, history moves forward as the contradictions between ideologies are resolved.
Eventually there will come an “end of history”, in which all contradictions dissolve into the highest synthesis.
Many have found it hard to agree with this claim, but nevertheless, the general framework of his thought has been widely adopted.
Marx claimed to have “inverted” Hegel’s theory. Instead of Hegel’s Historical Idealism, Marx created Historical Materialism.
For Marx, the different aspects of culture and civilization are products of a particular class structure, and are designed to support, justify and protect that structure. So society is constructed around one particular dominant class – the class that owns the principal means of production of an age.
This is how the bourgeoisie, the factory-owners and traders, grew stronger as a result of the new trade frontiers in America, Africa and the Far East. Eventually they brought down the feudal world, and created the modern capitalist world in their image.
Similarly, for Marx, liberal democratic politics is just a means to keep politics helplessly tied to capital. For whenever individuals compete economically with each other under equal terms, the one with the most money is almost sure to win.
Marx’s most mature presentation of his thought comes in his voluminous masterpiece, Das Kapital (1867–94). In this work, Marx abandons philosophy for the sake of economic analysis.
Marx takes the Labour Theory to mean that all value represents human labour, and so the value of a product is just the amount of human labour needed to produce it.
The wages that workers actually get in exchange for their labour equals only the amount that allows them to survive so as to keep on being exploited, and to raise children to be exploited in the future.
The vast majority of the value produced is always taken as profit by the ruling class, who own the means of production.
So capitalists, according to Marx, quite literally rob the proletariat of their freedom, their culture and their essentially human traits, and force them to work endlessly just to acquire the basic means of survival.
This, according to Marx, is the true face of capitalism. In fact, it is a result of the bourgeoisie doing exactly what a class needs to do in order to gain power – completely transform the means of production, and refashion society to create the conditions that keep it in power.
Contrary to the popular view, Marx did not predict the formation of communist countries, with which he is so closely identified. Rather, he predicted that capitalism would be utterly successful on a number of fronts.
Capitalism was destined to create the conditions necessary for the coming of the true “end of history”, in which all contradictions disappear.
Under these conditions the middle class is destined to disappear, and become part of the proletariat. Capital will be increasingly concentrated in fewer hands of extremely rich capitalists, while the rest will grow increasingly poor.
As this process continues, there will be no escaping the eventual crisis, in which the large majority will no longer be able to support itself.
As this happens, the class consciousness of the proletariat will grow, and inevitably the global proletarian revolution will follow.
Marx thought that capitalism’s essential urge to expand and look for further markets and cheaper labour was the driving force behind the European imperialism of the 19th century.
Imperialism was extracted from capitalism with the arrival in the late 19th century of the big corporations.
All these corporations owe their international scale of business to Henry Ford’s ingenious, widespread use of the production line.
Production capacity rose to levels that not even the early industrialists could dream of.
The period up to and beyond the First World War saw unchecked levels of industrialization and development.
This growth was particularly felt in the USA, whose involvement in the war was relatively short and far from home.
At the end of the war, the economies of the European empires were exhausted. But the American economy kept growing at an unprecedented pace, spurred on by its enhanced industrial capacity and new status as the world’s banker.
It was calculated that in 1929, 0.1 per cent of the population controlled 34 per cent of the country’s wealth, and owned as much money as the bottom 42 per cent.
But so much money in the hands of so few people meant that industrial supply became much higher than the demand, and profits were declining
The stock market crash hit an already skewed American economy, and this, coupled with some knee-jerk protectionist laws restricting trade, led to the Great Depression.
Because the European economies were reliant on the USA, the Depression spread across the Atlantic and then all over the globe.
In the US, the Depression brought an end to a decade of hands-off conservative rule, and the rise of the more interventionist Franklin D. Roosevelt (1882–1945). Roosevelt introduced a number of measures to bring the economy back to life using public spending. Collectively, these programmes were called the “New Deal”.
The economic theory behind the New Deal was created by John Maynard Keynes (1883–1946), who is known as the “father of modern liberal economics”. His ideas set the tone for liberal-democratic economic policy to this day.
Keynes claimed that recessions occur when economic units begin to accumulate money instead of allowing it to circulate. For example, when too much money is accumulated in too few hands, or when investors become wary of the future and decide to start saving money rather than investing it.
Keynes claimed that, while unchecked, capitalist markets go through unavoidable cycles of growth and recession. There is no crucial breaking point of the system as Marx thought, but also no possibility of constant growth.
At first, Roosevelt rejected Keynes’ ideas, saying he thought his explanation was simply too easy. But eventually only public spending did anything to help the situation, and it increased throughout the 1930s, culminating with the entrance of the US into the Second World War.
In the aftermath of the Second World War, much of Europe, China, Korea and Japan lay devastated, and the USA had the only economy capable of reconstructing them, if they were not locked behind the newly-forming “Iron Curtain” of the communist bloc.
Loyal to the Keynesian idea of circulation, the Marshall Plan provided $13 billion in aid to Europe, provided the recipients cooperated in an open market. The purpose of the Marshall Plan was two-fold: to get Europe on its feet again and to resist the spread of Soviet Russia.
For Europe, however, this meant the end of world domination. The empires that survived the war crumbled within the next twenty years. Europe played second fiddle to either Washington or Moscow for 45 years, and has only recently begun to re-emerge as a world power.
However, Keynesianism is by no means universally accepted. Economists like the American Milton Friedman (1912–2006) started questioning the importance of government intervention in the economy, leaving aside cases of extreme depression.
The monetarist argument rests on the observation that having more money will change nothing if all prices are adjusted accordingly – if you earn double but everything costs double, you’re at exactly the same position.
Some flavour of monetarism has been the prevailing approach from Western central banks since the late 1980s.
What limits to set on public spending is still one of the major debates in capitalist thinking today, and it forms the rough dividing line between right-and left-wing political thought.
But these have been economic concerns, and capitalism has attracted criticism for its cultural ramifications as much as its economic ones. Even before capitalism really got going, Adam Smith had suggested the need for free education to stop specialist workers doing repetitive jobs from becoming too stupid. Since then, critics have looked at everything from the environmental impact of the Industrial Revolution to the culture of consumerism that encourages people to keep spending.
Influenced by Marx, though rejecting some of his main premisses, Max Weber (1864–1920) developed his social criticism of capitalism in the first decades of the 20th century.
Capitalism arose, according to Weber, as part of the overall Protestant project of rationalizing social existence. This project changed the face of social interaction and made it regulated, rational and bureaucratic. Managers run both public affairs and businesses alike.
In capitalism, profit becomes the goal of commercial organizations, and their employees and customers are considered as means to that effect. Management experts and campaign managers make their living by constantly supplying the need of organizations for more efficiency from their workers and higher sales from their customers.
More extreme social critiques of capitalism follow Marx in claiming that the problem is with liberal ideology itself, not only with the way it was put into practice.
These are the origins of neo-Marxist social thought during the 1930s.
For the Frankfurt School, the heart of late post-industrial economies is the industrialization of culture. Culture becomes the main source of income in an age in which it is no longer a problem to supply mankind’s material needs.
Goods have become completely disposable in an everlasting race in adoration of the new. All the while, using only a fraction of mankind’s production capacity and working time in post-industrial economies, all the real needs of the population could be supplied.
The most important contribution of Horkheimer’s neo-Marxist thought is his admission that material conditions alone cannot bring about the revolution.
Horkheimer’s most famous student and collaborator, Theodor Adorno (1903–69), focused on the creation of global consumer culture.
For Adorno, mass media forms the backbone of post-industrial economies, responsible for intoxicating” the population and preventing them from improving their social situation. Not religion, but the media has become the “opium for the masses”.
The one thing that the average person in the past had over the present is the recognition that social conditions are far from perfect.
So it is that most of the debates of party politics and the theories of so-called alternative lifestyles are in fact doing nothing but offering the same basic system – they are nothing but a commodity in a new spectacular wrapper.
As every choice becomes a pseudo-choice and mankind becomes increasingly alienated from reality, the result is that the world becomes banal.
Capitalist thinking is just as nihilistic as technological thinking, because in capitalism nothing has an intrinsic value beyond its exchange value on the market. All essential distinctions between different occupations and lifestyles disappear, as they all merge into the capitalist market and lifestyle.
What is needed is a deep philosophical understanding of the purpose of mankind and concepts like justice, nobility and the good life.
John Rawls (1921–2002) revived academic interest in political philosophy and the question of the social justice of capitalism in English-speaking countries with his book A Theory of Justice (1971).
Although Rawls’ views are about as left as liberal thinking gets, they should not be confused with socialism. The main difference is that Rawls does not take equality and the reduction of social gaps as an end in itself. It does not matter, for Rawls, if there is gross inequality in the population, as long as the worst-off benefit from this.
Perhaps Rawls’ best-known critic is his Harvard colleague Robert Nozick (1938–2002). In his book Anarchy, State and Utopia (1974), he argues in favour of right-wing libertarianism.
Nozick thinks that this is sufficient to establish the idea that any system that demands that the distribution of goods has to fit a particular pattern is wrong because it impinges on people’s liberty.
The sort of rights and freedoms that Nozick acknowledges are things like the right to life – i.e. negative rights that specifically restrain people from causing harm – rather than positive rights to aid and assistance, like a right to education. Nozick proposes a minimal state.
Francis Fukuyama (b. 1952) also uses the idea that history – viewed as the process of human development – will stop. But instead of stopping with communism, Fukuyama believes that it ends with capitalism and liberal democracy.
Fukuyama approaches this from two angles: the first is an argument from natural science designed to show that human history is directional.
However, this argument is not enough to get Fukuyama to the claim that capitalism is the end of history. For that he needs a second argument, and this requires two more ideas:
That gets us to capitalism. However, establishing capitalism bundled with democracy as the final stage in the evolutionary process needs yet another argument. After all, in economic terms a market-orientated dictatorship might well be more efficient than a democracy, as it has less need to appease the people.
Where Fukuyama’s argument draws strength from the idea that capitalism is the most efficient way of producing goods, more recently economists like Nobel Prize-winners George Akerlof (b. 1940) and Joseph Stiglitz (b. 1943) have begun to look into this idea more rigorously.
Capitalism continues to spread untouched by all this theorizing, and one of its biggest growth areas is Sharia banking (banking that conforms to Islamic law). Like the Bible, the Koran takes a dim view of charging interest.
The emergence of Islamic capitalism, like the rise of greater industrial efficiency in the 19th century in countries that lacked an empire, is typical of capitalism’s flexibility and, by extension, its instability.
After all, if things were entirely stable, then new developments could not supersede the established way of doing things.
However, that instability can also throw things off balance. As far back as the 1630s, the early pioneers managed to develop what is now often regarded as the first example of a speculative bubble.
What varies is the effect they have on the wider economy and the turmoil they bring to people’s lives, but at their worst they can devastate the global economy, bringing poverty and hardship to millions.