The theory of capitalism describes the essential features of capitalism and how it functions.

Contents

1 Overview 2 Adam Smith 3 Karl Marx 4 Historical development 5 Capitalism and imperialism

Overview

The conception of what constitutes capitalism has changed significantly over time, as well as varying depending on the political perspective and analytical approach taken. Adam Smith focussed on the role of enlightened self-interest (the "invisible hand") and the role of specialisation in making capital accumulation efficient. Some proponents of capitalism (like Milton Friedman) emphasize the role of free markets, which, they claim, promote freedom and democracy. For many (like Immanuel Wallerstein), capitalism hinges on the elaboration of an economic system in which goods and services are traded in markets, and capital goods belong to non-state entities, onto a global scale. For others (like Karl Marx), it is defined by the creation of a labor market in which most people had to sell their labor-power in order to survive. As Marx argued (see also Hilaire Belloc) capitalism is also distinguished from other market economies with private ownership by the concentration of the means of production in the hands of a few.

Adam Smith

The first theorist of what we refer to as capitalism is generally thought to be Adam Smith. His 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, theorized that within a stable system of commerce and evaluation, individuals would respond to the rewards of earning more by specializing their production. These individuals would naturally, without specific state intervention, "direct ... that industry in such a manner as its produce may be of the greatest value." This would mean that the whole economy could produce more, and would therefore be wealthier. His systematic treatment of how exchange of goods, or a market, would create incentives to act in the general interest became the basis of what was then called political economy and later economics. It was also the basis for a theory of law and government which would gradually supersede the mercantilist regime then in place. Smith argued that protecting particular producers would lead to inefficient production, and that a national hoarding of specie would only increase prices, in an argument similar to that of David Hume.

Although he is often described as the "father of capitalism" (and the "father of economics"), Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty." However, Smith defined "capital" as stock, and "profit" as the just expectation to keep the revenue from improvements to that stock. Smith also made capital improvement the central goal of the economic and political system.[1] (http://www.adamsmith.org/smith/won-b2-c1.htm)

Karl Marx

When speaking of critics of capitalism, it is generally thought that the most lasting and thorough critique of the results of capitalism orginates with Karl Marx. According to Karl Marx, the treatment of labor as a commodity led to people valuing things more according to their price rather than their usefulness (see commodity fetishism) and to an expansion of the system of commodities. Marx observed that some people bought commodities in order to use them, while others bought them in order to sell elsewhere at a profit. Much of the history of late capitalism involves what David Harvey called the "system of flexible accumulation" in which more and more things become commodities, the value of which is determined by their exchange rather than by their use. Thus not only are pins commodities; shares of ownership in a factory that makes pins become commodities; then options on shares of stock become commodities; then portions of interest rates on bonds become commodities, and so on. The predominance of commodity speculation in modern capitalism very much shapes its results.

Marx defines "capital" as money and "capitalist production" as the use of money to denominate wealth in money terms, a meaning which referes to John Stuart Mill's definition of value in a market economy as being the going price for a good or service.

Historical development

Over the course of the eighteenth and nineteenth centuries, there was a gradual movement in Europe and the states founded by Europeans, to reduce trade barriers, specific restrictions on production and labor, localized weights and measurements, restraints in forming new businesses and royal perogatives in interfering with the operation of commerce. Two doctrines grew up to describe this process. One was the legal doctrine that the proper owner of land or a right was the one who could make best economic use of it, enshrined in property law. The other was the political doctrine of "laissez-faire" economics, namely that all coercive government regulation of the market is unjustified "interference" and that economies would perform best with government only playing a defensive role to insure the operation of free markets.

The next major revision to the theory of capitalism began occurring in the late 19th century with the expansion of corporations, finance, globalization of production and markets, and the increasing desire to tap the productive capacity of the capital sectors of the economies in order to secure markets and resources with which to continue economic growth. The state became seen by many, particularly the wealthy, as a vehicle for improving business conditions, securing markets, and gaining access to scarce materials, even if this required military force. This philosophy would reach a pinnacle in the 1920's with President Calvin Coolidge's declaration that "the business of America is business". Critics of this period label it "corporatism", while adherents generally regard it as an extension of "laissez-faire" principles of natural liberty.

Capitalism and imperialism

J.A. Hobson, a British liberal writing at the time of the fierce debate on imperialism during the Boer War, observed the spectacle of the Scramble for Africa and emphasized changes in European social structures and attitudes as well as capital flow, though his emphasis on the latter seems to have been the most influential and provocative. His so-called accumulation theory, extremely influential in its day, suggested that that capitalism suffered from under-consumption due the rise of monopoly capitalism and the resultant concentration of wealth in fewer hands, which apparently gave rise to a misdistribution of purchasing power. This argument calls attention to Europe's huge, impoverished industrial working class, which was typically far too poor to consume the goods produced by an industrialized economy. His analysis of capital flight and the rise of mammoth cartels later influenced Lenin in his book Imperialism: The Highest Stage of Capitalism, which has become a basis for the neo-Marxist analysis of imperialism.

Although Hobson's works are still read, it is now widely acknowledged that his analysis had neglected the mediating impact of a free-floating interest rate on the accumulation of unused capital. His causal economic relation between capitalism and imperialism, then, ultimately fails, although his discussions of capitalism's cultural impacts may remain valid.

Contemporary World-Systems theorist Immanuel Wallerstein perhaps better addresses Hobson's counterarguments without degrading Hobson's underlying inferences. Wallerstein's conception of imperialism as a part of a general, gradual extension of capital investment from the center of the industrial countries to an overseas periphery thus coincides with Hobson's. According to Wallerstein, Mercantilism became the major tool of semi-peripheral, newly industrialized countries such as Germany, France, Italy, and Belgium. Wallerstein hence perceives formal empire as performing a function analogous to that of the mercantilist drives of the late seventeenth and eighteenth centuries in England and France. The expansion of the Industrial Revolution hence contributed to the emergence of an era of aggressive national rivalry, leading to the late nineteenth century scramble for Africa and formal empire.