The discussion of “Capitalism” in Wikipedia is extensive, replete with a wide variety of different concepts, and potentially confusing by its attempt to portray several different theories of capitalism. Yet it’s clear that we must mean something by the term, since it polarizes people into two main camps, those who endorse it and claim its essential validity, and those who resent it and charge it with various human abuses. My purpose here is to strip the idea down to its bare essentials.
So what is capitalism after all?
The essential ingredients of capitalism have a long evolutionary history. Even the earliest civilizations, for example, minted coins, used currencies, and implemented public markets where people actively bought and sold goods. Most descriptions of capitalism, including Adam Smith’s, emphasize the nature of capitalist commerce as stemming from the notion of a trade (exchange) in which a seller offers a good for sale, a buyer expresses an interest in it, and the two agree on a price (some amount of currency) as the condition of the trade. In this model, the seller is free to offer his goods for sale (not “black market”), and is not bound to accept any specific price; and the buyer is free to abandon the transaction or to accept its terms, nor is he forced to accede to any particular price demand. This is the basic concept of the “free market.”
In this way, free markets have existed for centuries. They can be as simple as a fruit stand in a small village where a farmer brings his produce and offers it for sale to interested passers-by. There may be some form of sheriff or policeman in the vicinity to assure that the seller’s goods aren’t stolen, or that buyers aren’t cheated out of their money by fake or inferior goods; or there may not be. Generally the free market concept assumes a fair and honest transaction, implying that the market has to be regulated at least by concepts of honesty and fairness, if not by explicit law.
But this model of the free market is neither descriptive of our modern world, nor sufficient to understand why Karl Marx–or anyone else–may have had a problem with it. I like to think of capitalism in terms of the economic features that Marx hoped to remedy, thus providing a means of distinguishing Marx from that which he criticized.
The story begins in the middle of the 18th century with James Watt’s invention of the steam engine (1775). His engine launched a major change in the structure of western society. Remember, before the Industrial Age began, people lived in a feudal, fundamentally agrarian society. Families lived on a common homestead in multi-generational homes and used subsistence agriculture to provide for their personal needs. Children were raised in an environment with several adults to share the burden and provide a safety net protecting against the loss of a parent or changes in the local economy.
But with the Industrial Revolution, factories sprang up at transportation hubs and began to attract young men from farms to work for money, something young men were not likely to see much as farmers. This change was not just economic. Young men need young women, and so there was a need to encourage women to move to the city as potential mates; thus was born the Cinderella myth at about the same time. Now, a young woman could dream of a Prince Charming who would take her away to their castle, which they would own together, and live happily ever after, he working at the factory while she raised the children and took care of the family nest. Thus the appearance of factories as the focal point of productive labor was matched with the change of the family model from a multi-generational extended group to the nuclear family consisting of just one man and one woman. This set the stage for a mass migration of population from the rural hinterlands to the city, and provided the employable fodder needed to staff the burgeoning industrialization.
It provided more liquidity, more freedom for the workers to move from factory to factory
accordingly as work was available, since they didn’t have to drag around either land or many family members with them. It was great for the employers, but not so good for the family, as it exposed the family itself to more risks since it rested on fewer support members.
For society as a whole, there was also another downside to this arrangement. The family no longer owned a subsistence farm to feed them. They were entirely dependent on an employer to provide the means of their survival. Unfortunately, factory owners owed no allegiance to the men who worked for them; they were hired on the condition of pay, and could be let go when no longer needed. Also, there were no economic protections for the unemployed and impoverished. Capitalism had grown up virtually unregulated, so there were few limitations on the freedom of employers or provision for those individuals abandoned by the owners of production. Debtors’ prisons and workhouses were set up to keep the unattached off the streets, out of trouble, and as punishments for those who didn’t pay their debts. Children ran free, uncared for, able to survive only by theft, picking pockets, begging, and other mischief. Charles Dickens wrote novels describing the depravity of living conditions in the cities, which eventually awoke the social conscience of the times to the need to make some provision for those whom capitalism had abandoned.
Thus the 19th century is the era when the industrial revolution had created, using James Watt’s steam engine, a transportation system based on railroads, and a production system based on the factory that made a large segment of society dependent on a class of factory and business owners for the basic means of human subsistence. And this is the millieu in which Marx’s theory of class warfare emerged.
The essential, core feature of capitalism is illustrated best by the 19th century factory. A factory is owned by one man or a small group (proprietors) forming a partnership. Later, the legal forms evolved to recognize a new type of ownership called a corporation. In any case, there were a group of people who owned these businesses and factories, and another group of people who did the work of the business, called employees.
Now there is a sort of magic created by this system. In the old days, craftsmen sold the products of their labor, and they received the full value of their products as the proceeds of the sale. But with the factory system, the employee received none of the proceeds of sales; he was paid a wage instead, which was arranged by an agreement between the employee and his master. Since there were usually a great many free men seeking employment, the employee had little leverage in negotiating his wage; if he didn’t like it, the master could release him from service and hire someone else for the same, or even less money, depending on the relative degree of desperation of the applicant. Meanwhile, the factory owner pocketed the gross sales of the factory’s products. From that income, he paid employee wages, bought what raw materials he needed, and paid any other operating expenses for his factory. But he never sold the factory. That remained his own property, and was available day after day to grind out copies of products. He sold the products but kept the factory that produced them.
Thus a new opportunity emerged. A craftsman can only produce so much in a day: the amount that his personal labor can generate. The factory owner, on the other hand, if there is a surplus of money left over from sales after paying all expenses, can expand the factory by buying new equipment, hiring more labor, and even building new factories. This is all done with the surplus money, or “profit,” generated with his employees’ labor. Once a working business is set up that generates a profit, it can expand indefinitely, adding to itself through a process of “capital accumulation” until the owner-proprietor has a huge income while his laborers are all still competing with each other over who will get the available jobs for the least wages.
In modern times, this idea of capital (income-generating property) has been extended to intellectual assets as well as the more familiar tangible kinds of things. Thus copyrights protect movies, books, and music sales, while patents protect new inventions. This protection means, for example, that the movie maker continues to own the movie; people who buy it don’t own it, aren’t allowed to show it or reproduce it, so anyone who wants to see the movie has to get it from the original producer. It becomes a kind of factory producing profits without being consumed itself.
Thus we have two basic kinds of individuals in the economy: capitalists, who own income-producing property; and laborers, who work for a wage negotiated independently of the value of any sales gained from the products the laborers produce. In this view, managers on the owner’s staff, who control and oversee the day to day operation of the business, are just as much laborers as a machine operator; managers in most cases work for a wage as well, which maybe a salary (fixed income) or a wage (hourly). Salaried workers cannot earn more money by working more hours. Wage earners do. In other words, the salaried employee is even more limited in earning potential than an hourly worker.
A capitalist economy has many other features:
1. Most markets are not free markets in the classical sense. They are mass consumer markets. The store sets a price for its wares and the buyer has only one choice: buy it for the set price or get out of the store and make room for another buyer. There are commodity markets where goods are auctioned, but these are usually not open to the general public.
2. Banks use money as capital by collecting it from people who have some (“savings accounts”) and giving it to people who need it (“loans”), while charging a fee for its use. Thus the money loaned becomes a product earning profits, created from the savings accounts as capital.
3. The law is extended to define a variety of legal forms of ownership, including simple proprietorships, companies, limited corporations, and public companies owned by shareholders. In each of these cases, there is a precise legal identification of the people who constitute the owners of the business, since they are the people who own the business’s capital assets and have all the rights of ownership; and who own any profits from its sales.
4. The use of interest by banks to make profits, and the use of banks by businesses to secure funds to meet short-term needs and make long-term investments in growth, results in the general diffusion of the burden of interest throughout the economy.
5. The prevalent use of assembly-line manufacture, which structures factory labor into specific jobs doing specific, limited and highly repetitive tasks, which are usually boring and provide little or no job satisfaction to workers
6. The invention of new, non-tangible kinds of capital assets such as movies, books, magazines, stories and articles, music records, sheet music, song copyrights, patents, and commercial software.
7. Modern capitalist economies usually include some form of social safety network to improve the living conditions of the laborer class, as well as those extensive numbers of people who are not employed and hence have no source of income. These types of services are considered “welfare” or “socialist” types of features, but are generally believed to be desirable, if for no other reason than to keep the streets clean of homeless people and starving beggars.
But despite these and other features of a modern capitalist economy, the basic concept is that of capital accumulation: selling products laborers make and investing the profits in the growth of the company, thus creating a constantly growing production capacity and thus more profits.
It’s this cycle of growth and re-investment which has created the vast difference in economic wealth of the modern world as compared to its condition a mere 150 years ago.