BUSINESS

Capitalism

Capitalism

Introduction

Capitalism, also known as a free market economy or a free enterprise economy, is an economic system (or, in Marxist terminology, a mode of production) characterized by three essential features. First, the factors of production are commercialized and the means of production are privately owned. Second, economic surplus in the form of profits is generally reinvested for further production rather than simply consumed or devoted to nonproductive ends. Third, production and investment decisions as well as income distribution are generally determined through the mechanism of markets. The term “capitalism” was introduced by socialist thinkers in the nineteenth century, originally with a critical connotation (Klein, 2007).

Marxist sociology sees capitalism as a social and economic formation following feudalism and preceding socialism. Karl Marx traced the origins of capitalism to the struggles of urban corporations and communes in late medieval Europe to free themselves from feudal arrangements, under which property was regarded as a trust. The result, according to Marx, was the emergence of what he called civil society, a sphere of social life in which economic activity could be pursued largely free of political and religious restrictions. These conditions made the accumulation of capital possible, according to Marx, and thus the technological innovations that led to the Industrial Revolution. According to Marxist accounts, capitalism is inherently unstable, for the exploitation of labor through the appropriation of surplus value gives rise to unavoidable class conflict and irresolvable crisis tendencies.

Where Marx saw capitalism as a distinctive historical formation, Max Weber defined it more broadly as pursuit of profit through exchange, which has, in Weber's words, “existed everywhere” in various forms. What makes modern capitalism distinctive, according to Weber, is its highly rationalized organization, which in turn was made possible by the separation of business from the household and the rise of rational bookkeeping. According to Weber, technological innovations and the legal and administrative structures of the modern national state also played a role in the development of this modern, rationalized form of capitalism. Ultimately, however, Weber traced its origins to the Protestant ethic. In his view, the Protestant ethic furthered the rationalization characteristic of modern capitalism and fostered capital accumulation by encouraging the acquisition of wealth while discouraging enjoyment of it. Thus for Weber, rationalization ultimately eroded the Protestant ethic that had done so much to foster it, thereby stripping economic acquisition of its earlier religious meaning and significance and rendering the modern capitalist economy an “iron cage.”

Since its emergence, modern capitalism has undergone several profound transformations, including the shift from commerce to industry in the eighteenth century and the end of laissez-faire in the wake of the Great Depression and World War II. Sociologists typically distinguish between early or liberal capitalism and late or organized capitalism. In contrast to liberal capitalism, organized capitalism has been characterized by economic concentration and increased state intervention (Hawken et al, 1990).

On the one hand, individual or family ownership of the means of production was supplanted by the joint stock company, national corporations, and eventually multinational ...