Academic perspectives on capitalism
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Throughout
modern history The term modern period or modern era (sometimes also called modern history or modern times) is the period of history that succeeds the Middle Ages (which ended approximately 1500 AD). This terminology is a historical periodization that is applie ...
, a variety of perspectives on capitalism have evolved based on different schools of thought.


Overview

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
was one of the first influential writers on the topic with his book '' The Wealth of Nations'', which is generally considered to be the start of
classical economics Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...
which emerged in the 18th century. To the contrary, Karl Marx considered capitalism to be a historically specific mode of production and considered capitalism a phase of economic development that would pass and be replaced by
pure communism In Marxist thought, a communist society or the communist system is the type of society and economic system postulated to emerge from technological advances in the productive forces, representing the ultimate goal of the political ideology of c ...
. In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a
social revolution Social revolutions are sudden changes in the structure and nature of society. These revolutions are usually recognized as having transformed society, economy, culture, philosophy, and technology along with but more than just the political syst ...
to a socialist-style economy.Wheen, Francis ''Books That Shook the World: Marx's Das Kapital''. 1st ed. London: Atlantic Books, 2006 For Marx, this cycle of the extraction of the surplus value by the owners of
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...
or the
bourgeoisie The bourgeoisie ( , ) is a social class, equivalent to the middle or upper middle class. They are distinguished from, and traditionally contrasted with, the proletariat by their affluence, and their great cultural and financial capital. They ...
becomes the basis of
class struggle Class conflict, also referred to as class struggle and class warfare, is the political tension and economic antagonism that exists in society because of socio-economic competition among the social classes or between rich and poor. The forms ...
. This argument is intertwined with Marx's version of the labor theory of value asserting that labor is the source of all value and thus of profit.
Max Weber Maximilian Karl Emil Weber (; ; 21 April 186414 June 1920) was a German sociologist, historian, jurist and political economist, who is regarded as among the most important theorists of the development of modern Western society. His ideas profo ...
considered market exchange rather than production as the defining feature of capitalism. In contrast to their counterparts in prior modes of economic activity, capitalist enterprises was their rationalization of production, directed toward maximizing
efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
and
productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
; a tendency leading to a sociological process of enveloping rationalization. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a
manor Manor may refer to: Land ownership *Manorialism or "manor system", the method of land ownership (or "tenure") in parts of medieval Europe, notably England *Lord of the manor, the owner of an agreed area of land (or "manor") under manorialism *Man ...
. Meanwhile
institutional economics Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
, once the main
school of economic thought In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern ...
in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. In the late 19th century, the
German Historical School :''This is an article about a school of thought in the area of law. For economics, see historical school of economics.'' The German Historical School of Jurisprudence is a 19th-century intellectual movement in the study of German law. With Romant ...
of economics diverged with the emerging Austrian School of economics, led at the time by
Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theories of marginalism and marginal utility ...
. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter, a forerunner of the Austrian School of economics, emphasized the creative destruction of capitalism—the fact that market economies undergo constant change. The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of
market economy A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ...
against 20th century proponents of socialist planned economies. Among Mises's arguments were the economic calculation problem, which was first proposed by Mises in 1920 and later expounded by Hayek.F. A. Hayek, (1935), "The Nature and History of the Problem" and "The Present State of the Debate," in F. A. Hayek, ed. ''Collectivist Economic Planning'', pp. 1–40, 201–43. The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the
price mechanism In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyer and seller who nego ...
, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Partially opposed to that view, the British economist John Maynard Keynes argued in his 1937 '' The General Theory of Employment, Interest, and Money'' that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle and reduce the abuses of
laborers A laborer (or labourer) is a person who works in manual labor types in the construction industry workforce. Laborers are in a working class of wage-earners in which their only possession of significant material value is their labor. Industries e ...
. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
.Erhardt III, Erwin. "History of Economic Development." University of Cincinnati. Lindner Center Auditorium, Cincinnati. 7 Nov. 2008.
Supply-side economics Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit fr ...
developed during the 1970s in response to Keynesian economic policy and in particular the failure of
demand management Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-leve ...
to
stabilize Stabilizer, stabiliser, stabilisation or stabilization may refer to: Chemistry and food processing * Stabilizer (chemistry), a substance added to prevent unwanted change in state of another substance ** Polymer stabilizers are stabilizers use ...
Western economies during the
stagflation of the 1970s In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions ...
in the wake of the oil crisis in 1973.Case, Karl E. & Fair, Ray C. (1999). ''Principles of Economics'' (5th ed.), p. 780. Prentice-Hall. . It drew on a range of non-Keynesian economic thought, particularly Austrian School thinking on entrepreneurship and
new classical macroeconomics New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical economics, neoclassical framework. Specifically, it emphasizes the importa ...
. The intellectual roots of supply-side economics have also been traced back to various early economic thinkers such as
Ibn Khaldun Ibn Khaldun (; ar, أبو زيد عبد الرحمن بن محمد بن خلدون الحضرمي, ; 27 May 1332 – 17 March 1406, 732-808 AH) was an Arab The Historical Muhammad', Irving M. Zeitlin, (Polity Press, 2007), p. 21; "It is, of ...
, Jonathan Swift, David Hume,
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
and
Alexander Hamilton Alexander Hamilton (January 11, 1755 or 1757July 12, 1804) was an American military officer, statesman, and Founding Father who served as the first United States secretary of the treasury from 1789 to 1795. Born out of wedlock in Charlest ...
. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally. Today, the majority academic research on capitalism in the English-speaking world draws on neoclassical economic thought. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on
capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
-based financing rather than state financing. Milton Friedman took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of '' The New York Times'', where he claims that the social responsibility of business is "to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud". This is similar to Smith’s argument that self-interest in turn benefits the whole of society.Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times Magazine 13 Sep. 1970. Work like this helped lay the foundations for the coming marketization (or privatization) of state enterprises and the supply-side economics of
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
and Margaret Thatcher. The
Chicago School of economics The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stigle ...
is best known for its free market advocacy and
monetarist Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national ...
ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention.


Classical political economy

The classical school of economic thought emerged in Britain in the late 18th century. The classical political economists
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
, David Ricardo,
Jean-Baptiste Say Jean-Baptiste Say (; 5 January 1767 – 15 November 1832) was a liberal French economist and businessman who argued in favor of competition, free trade and lifting restraints on business. He is best known for Say's law—also known as the law of ...
and
John Stuart Mill John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...
published analyses of the production, distribution and exchange of goods in a market that have since formed the basis of study for most contemporary economists. In France, Physiocrats like
François Quesnay François Quesnay (; 4 June 1694 – 16 December 1774) was a French economist and physician of the Physiocratic school. He is known for publishing the "Tableau économique" (Economic Table) in 1758, which provided the foundations of the ideas of ...
promoted free trade based on a conception that wealth originated from land. Quesnay's ''Tableau Économique'' (1759) described the economy analytically and laid the foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed tariffs and
customs duties A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and poli ...
and advocated free trade.
Richard Cantillon Richard Cantillon (; 1680s – ) was an Irish-French economist and author of '' Essai Sur La Nature Du Commerce En Général'' (''Essay on the Nature of Trade in General''), a book considered by William Stanley Jevons to be the "cradle of p ...
defined long-run equilibrium as the balance of flows of income and argued that the
supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
mechanism around land influenced short-term prices. Smith's attack on
mercantilism Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
and his reasoning for "the system of natural liberty" in '' The Wealth of Nations'' (1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today, particularly his theory of the " invisible hand" of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period. He criticized monopolies, tariffs, duties and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo, second most important of the classical political economists and one of the most influential economists of modern times. In '' The Principles of Political Economy and Taxation'' (1817), Ricardo developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade. Ricardo was a supporter of Say's law and held the view that full employment is the normal equilibrium for a competitive economy. He also argued that inflation is closely related to changes in quantity of money and credit and was a proponent of the law of
diminishing returns In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal ( ceteris paribu ...
, which states that each additional unit of input yields less and less additional output. The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods.Eric Aaron, ''What's Right?'' (Dural, Australia: Rosenberg Publishing, 2003), 75. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.


Marx and critique of political economy

Karl Marx considered capitalism to be a historically specific mode of production. Marx's critique of political economy encompasses the study and exposition of the mode of production and ideology of bourgeois society, that is, the fundamental "economic" and social categories present within what for Marx is the capitalist mode of production. In contrast to the classics of political economy, Marx was concerned with lifting the "ideological veil" of surface phenomena and exposing the norms, axioms, social practices, institutions and so on, that reproduced the social phenomenon of capital. The central works in Marx's critique of political economy are '' Grundrisse'', '' A Contribution to the Critique of Political Economy'' and ''Das Kapital''. Marx's companion Friedrich Engels also critiqued the economy in his ''
Outlines of a Critique of Political Economy ''Outlines of a Critique of Political Economy'' is an article by Friedrich Engels, first published in German in 1843 for the Deutsch-Französische Jahrbücher.https://tilde.town/~xat/rt/pdf/engels_1843_outline_political_economy.pdf The article ...
'' (1844), which helped lay down some foundation for what Marx was to take further, and Engels just like Marx also compared economists with theologians, e.g by referring to Adam Smith as the ''economic Luther''. Some foundational concepts in Marx critique of political economy are the following: * Labour and capital are historically specific forms of social relations, and labour isn't the source of all wealth. * Labour is the other side of the same coin as capital, labour presupposes capital, and capital presupposes labour. * Money is not in any way something trans-historical or "natural" (which goes for the other categories of the economy as well), and gains its value due to social relations rather than any inherent quality. * The individual doesn't exist in some form of vacuum but is rather enmeshed in social relations. For Marx, the capitalist stage of development or "
bourgeois The bourgeoisie ( , ) is a social class, equivalent to the middle or upper middle class. They are distinguished from, and traditionally contrasted with, the proletariat by their affluence, and their great cultural and financial capital. They ...
society" represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist or
communist Communism (from Latin la, communis, lit=common, universal, label=none) is a far-left sociopolitical, philosophical, and economic ideology and current within the socialist movement whose goal is the establishment of a communist society, a s ...
transformation of human society as the end of the series of first aristocratic, then capitalist and finally working class rule was reached. Following
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
, Marx distinguished the use value of commodities from their
exchange value In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of the four major attributes of a commodity, i.e., an item or service produced for, and sold on the market, the other three attributes be ...
in the market. According to Marx,
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...
is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism because the exchange value of labor power—as reflected in the wage—is less than the value it produces for the capitalist. He argues this difference in values constitutes
surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
, which the capitalists extract and accumulate. In his book ''
Capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...
'', Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers—all prior class societies had extracted
surplus labor Surplus labour (German: ''Mehrarbeit'') is a concept used by Karl Marx in his critique of political economy. It means labour performed in excess of the labour necessary to produce the means of livelihood of the worker ("necessary labour"). The "su ...
, but capitalism was new in doing so via the sale-value of produced commodities. He argues that a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent and must instead be compelled to survive to sell their labor to manage to survive. In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution . For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of
class struggle Class conflict, also referred to as class struggle and class warfare, is the political tension and economic antagonism that exists in society because of socio-economic competition among the social classes or between rich and poor. The forms ...
. In '' Imperialism, the Highest Stage of Capitalism'' (1916), Vladimir Lenin modified classic Marxist theory and argued that capitalism necessarily induced
monopoly capitalism ''Monopoly Capital: An Essay on the American Economic and Social Order'' is a 1966 book by the Marxian economists Paul Sweezy and Paul A. Baran. It was published by Monthly Review Press. It made a major contribution to Marxian theory by shiftin ...
—which he also called "imperialism"—to find new markets and resources, representing the last and highest stage of capitalism. Some 20th-century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive. To these thinkers, capitalist class processes are simply those in which surplus labor takes the form of
surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
, usable as capital while other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted even if this surplus is not produced by capitalist activity as when an absolute majority of the population is engaged in non-capitalist economic activity. David Harvey extends Marxian thinking through which he theorizes the differential production of place, space and political activism under capitalism. He uses Marx’s theory of crisis to aid his argument that capitalism must have its "fixes", but that we cannot predetermine what fixes will be implemented, nor in what form they will be. This idea of fix is suggestive and could mean fix as in stabilize, heal or solve, or as in a junky needing a fix—the idea of preventing feeling worse in order to feel better. In ''Limits to Capital'' (1982), Harvey outlines an overdetermined, spatially restless capitalism coupled with the spatiality of crisis formation and its resolution. Furthermore, his work has been central for understanding the contractions of capital accumulation and international movements of capitalist modes of production and money flows.Lawson, Victoria. Making Development Geography (Human Geography in the Making). New York: A Hodder Arnold Publication, 2007. Print. In his essay, "Notes towards a theory of uneven geographical development", Harvey examines the causes of the extreme volatility in contemporary political economic fortunes across and between spaces of the world economy. He bases this uneven development on four conditionalities: (1) the material embedding of capital accumulation processes in the web of socio-ecological life; (2) accumulation by dispossession; (3) the law-like character of capital accumulation in space and time; and (4) political, social and "class" struggles at a variety of geographical scales.


Weberian political sociology

In some social sciences, the understanding of the defining characteristics of capitalism has been strongly influenced by 19th century German social theorist
Max Weber Maximilian Karl Emil Weber (; ; 21 April 186414 June 1920) was a German sociologist, historian, jurist and political economist, who is regarded as among the most important theorists of the development of modern Western society. His ideas profo ...
. Weber considered market exchange rather than production as the defining feature of capitalism. In contrast to their counterparts in prior modes of economic activity, capitalist enterprises are characterized by their rationalization of production, directed toward maximizing
efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
and
productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
, a tendency leading to a sociological process of enveloping rationalization. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a
manor Manor may refer to: Land ownership *Manorialism or "manor system", the method of land ownership (or "tenure") in parts of medieval Europe, notably England *Lord of the manor, the owner of an agreed area of land (or "manor") under manorialism *Man ...
. In his book '' The Protestant Ethic and the Spirit of Capitalism'' (1904–1905), Weber sought to trace how a particular form of religious spirit, infused into traditional modes of economic activity, was a condition of possibility of modern Western capitalism. For Weber, the spirit of capitalism was in general that of ascetic Protestantism—this ideology was able to motivate extreme rationalization of daily life, a propensity to accumulate capital by a religious ethic to advance economically and thus also the propensity to reinvest capital: this was sufficient then to create "self-mediating capital" as conceived by Marx. This is pictured in Proverbs 22:29 "Seest thou a man diligent in his calling? He shall stand before kings" and in Colossians 3:23 "Whatever you do, do your work heartily, as for the Lord rather than for men". In the ''Protestant Ethic'', Weber further stated that "moneymaking—provided it is done legally—is, within the modern economic order, the result and the expression of diligence in one’s calling" and "If God show you a way in which you may lawfully get more than in another way (without wrong to your soul or to any other), if you refuse this, and choose the less gainful way, you cross one of the ends of your calling, and you refuse to be God's steward, and to accept His gifts and use them for him when He requireth it: you may labour to be rich for God, though not for the flesh and sin" (p. 108). Most generally for Weber, Western capitalism was the "rational organization of formally free labor". The idea of the "formally free" laborer meant in the double sense of Marx that the laborer was both free to own property and free of the ability to reproduce his labor power, i.e. was the victim of expropriation of his means of production. It is only on these conditions, still abundantly obvious in the modern world of Weber, that Western capitalism is able to exist. For Weber, modern Western capitalism represented the order "now bound to the technical and economic conditions of machine production which to-day determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt" (p. 123). This is further seen in his criticism of "specialists without spirit, hedonists without a heart" that were developing in his opinion with the fading of the original Puritan "spirit" associated with capitalism.


Institutional economics

Once the main school of economic thought in the United States, institutional economics holds that capitalism cannot be separated from the political and social system within which it is embedded. It emphasizes the legal foundations of capitalism (see John R. Commons) and the evolutionary, habituated and volitional processes by which institutions are erected and then changed (see
John Dewey John Dewey (; October 20, 1859 – June 1, 1952) was an American philosopher, psychologist, and educational reformer whose ideas have been influential in education and social reform. He was one of the most prominent American scholars in the f ...
, Thorstein Veblen and
Daniel Bromley Daniel W. Bromley (born 1940) is an economist, the former Anderson-Bascom Professor of applied economics at the University of Wisconsin–Madison, and since 2009, Emeritus Professor. His research in institutional economics explains the foundati ...
). One key figure in institutional economics was Thorstein Veblen who in his book '' The Theory of the Leisure Class'' (1899) analyzed the motivations of wealthy people in capitalism who conspicuously consumed their riches as a way of demonstrating success. The concept of
conspicuous consumption In sociology and in economics, the term conspicuous consumption describes and explains the consumer practice of buying and using goods of a higher quality, price, or in greater quantity than practical. In 1899, the sociologist Thorstein Veblen co ...
was in direct contradiction to the neoclassical view that capitalism was efficient. In ''
The Theory of Business Enterprise ''The Theory of Business Enterprise'' is an economics (or political economy) book by Thorstein Veblen, published in 1904, that looks at the growing corporate domination of culture and the economy. Summary At its heart, ''The Theory of Business Ent ...
'' (1904), Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power.


German Historical School and Austrian School

From the perspective of the
German Historical School :''This is an article about a school of thought in the area of law. For economics, see historical school of economics.'' The German Historical School of Jurisprudence is a 19th-century intellectual movement in the study of German law. With Romant ...
, capitalism is primarily identified in terms of the organization of production for
markets Market is a term used to describe concepts such as: * Market (economics), system in which parties engage in transactions according to supply and demand * Market economy *Marketplace, a physical marketplace or public market Geography *Märket, a ...
. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus. For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary economy combined with an emphasis on the
profit motive In economics, the profit motive is the motivation of firms that operate so as to maximize their profits. Mainstream microeconomic theory posits that the ultimate goal of a business is "to make money" - not in the sense of increasing the firm's s ...
. In the late 19th century, the German Historical School of economics diverged with the emerging Austrian School of economics, led at the time by
Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theories of marginalism and marginal utility ...
. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter, a forerunner of the Austrian School of economics, emphasized the " creative destruction" of capitalism—the fact that market economies undergo constant change. At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter and many contemporary economists influenced by his work argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change. The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of
market economy A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ...
against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Among their arguments were the economic calculation problem, which was first proposed by Mises in 1920 and later expounded by Hayek. The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the
price mechanism In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyer and seller who nego ...
, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows corrections that prevent
shortages In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply (surplus). Definitions In a perfect market (one that matches ...
and surpluses on the basis of individual consensual decisions. Mises and Hayek argued that this is the only possible solution and without the information provided by market prices socialism lacks a method to rationally allocate resources. Mises argued in a famous 1920 article "
Economic Calculation in the Socialist Commonwealth ''Economic Calculation in the Socialist Commonwealth'' is an article by Austrian School economist Ludwig von Mises. Its critique against economic calculation in a planned economy triggered the decades-long economic calculation debate. The arti ...
" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production, then no rational prices could be obtained for
capital goods The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...
as they were merely internal transfers of goods in a socialist system and not "objects of exchange", unlike final goods, therefore they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently. This led him to declare "that rational economic activity is impossible in a socialist
commonwealth A commonwealth is a traditional English term for a political community founded for the common good. Historically, it has been synonymous with "republic". The noun "commonwealth", meaning "public welfare, general good or advantage", dates from the ...
". Mises developed his critique of socialism more completely in his 1922 book '' Socialism: An Economic and Sociological Analysis''. Since a modern economy produces such a large array of distinct goods and services and consists of such a large array of consumers and enterprises, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within
supply-side economics Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit fr ...
built on the work of the Austrian School and particularly emphasize Say's law that "supply creates its own demand". To this school, capitalism is defined by lack of state restraint on the decisions of producers. Austrian economists claim that Marx failed to make the distinction between capitalism and
mercantilism Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
. They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist doctrines of mercantilism with capitalism. Austrian economics has been a major influence on some forms of right-libertarianism in which '' laissez-faire'' capitalism is considered to be the ideal economic system. It influenced economists and political philosophers and theorists including Henry Hazlitt, Hans-Hermann Hoppe, Israel Kirzner, Murray Rothbard, Walter Block and
Richard M. Ebeling __NOTOC__ Richard M. Ebeling (; born January 30, 1950) is an American libertarian author who was the president of the Foundation for Economic Education (FEE) from 2003 to 2008. Ebeling is currently the BB&T Distinguished Professor of Ethics and ...
.


Keynesian economics

In his 1937 '' The General Theory of Employment, Interest, and Money'', the British economist John Maynard Keynes argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. Essentially rejecting Say's law, he argued that some people may have a liquidity preference that would see them rather hold money than buy new goods or services, which therefore raised the prospect that the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
would not end without what he termed in the ''General Theory'' "a somewhat comprehensive socialization of investment". Keynesian economics challenged the notion that ''laissez-faire'' capitalist economics could operate well on their own without state intervention used to promote
aggregate demand In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...
, fighting high unemployment and deflation of the sort seen during the 1930s. He and his followers recommended " pump-priming" the economy to avoid recession: cutting taxes, increasing government borrowing and spending during an economic down-turn. This was to be accompanied by trying to control wages nationally partly through the use of inflation to cut real wages and to deter people from holding money. Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression. However, the premises of Keynes’s work have since been challenged by neoclassical and
supply-side economics Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit fr ...
and the Austrian School. Another challenge to Keynesian thinking came from his colleague
Piero Sraffa Piero Sraffa (5 August 1898 – 3 September 1983) was an influential Italian economist who served as lecturer of economics at the University of Cambridge. His book ''Production of Commodities by Means of Commodities'' is taken as founding the neo- ...
and subsequently from the Neo-Ricardian school that followed Sraffa. In Sraffa's highly technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest
rate of profit In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment. Historical cost ''vs.'' market ...
causes a dynamic instability in social and economic relations.


Supply-side economics

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices. The term "supply-side economics" was thought for some time to have been coined by journalist
Jude Wanniski Jude Thaddeus Wanniski (June 17, 1936 – August 29, 2005) was an American journalist, conservative commentator, and political economist. Early life and education Wanniski was born in Pottsville, Pennsylvania, the son of Constance, who worked at ...
in 1975, but according to Robert D. Atkinson's ''Supply-Side Follies'' the term "supply side" ("supply-side fiscalists") was first used in 1976 by Herbert Stein (a former economic adviser to President Nixon) and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell and Arthur Laffer. Today, supply-side economics is often conflated with the politically rhetorical term " trickle-down economics", but as Jude Wanniski points out in his book ''The Way The World Works'' trickle-down economics is conservative Keynesianism associated with the Republican Party. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally. Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster-growing economy would be sufficient to compensate completely for the short-term costs of a tax cut and that tax cuts could in fact cause overall revenue to increase.


Neoclassical economics and the Chicago School

Today, the majority academic research on capitalism in the English-speaking world draws on neoclassical economic thought. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on
capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
-based financing rather than state financing. Milton Friedman took many of the basic principles set forth by
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of ''The New York Times'', where he claims that the social responsibility of business is "to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud". This is similar to Smith’s argument that self-interest in turn benefits the whole of society. Work like this helped lay the foundations for the coming marketization (or privatization) of state enterprises and the
supply-side economics Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit fr ...
of
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
and Margaret Thatcher. The
Chicago School of economics The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stigle ...
is best known for its free market advocacy and
monetarist Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national ...
ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention. Friedman argued that the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
was result of a contraction of the money supply controlled by the Federal Reserve and not by the lack of investment as John Maynard Keynes: "There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects".
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
, former Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression. Neoclassical economists, today the majority of economists, consider value to be subjective, varying from person to person and for the same person at different times and thus reject the labor theory of value.
Marginalism Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of wa ...
is the theory that economic value results from marginal utility and
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it r ...
(the marginal concepts). These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production.


Mainstream economics

Mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to h ...
is a loose term used to refer to the non-
heterodox economics Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics.Frederic S. Lee, 2008. "heterodox economics," ''The New Palgrave Dictionary of Economics' ...
taught in prominent universities. It is most closely associated with neoclassical economics, or more precisely by the
neoclassical synthesis The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Key ...
, which combines neoclassical approach to microeconomics with Keynesian approach to macroeconomics.Clark, B. (1998). ''Political-economy: A comparative approach''. Westport, CT: Praeger. Mainstream economists are not generally separated into schools, but two major contemporary orthodox
economic schools of thought In the history of economic thought, a school of economic thought is a group of economics, economic thinkers who share or shared a common perspective on the way economy, economies work. While economists do not always fit into particular schools, pa ...
are the " saltwater and freshwater schools". The saltwater schools consist of the universities and other institutions located near the East and West Coast of the United States, such as
Berkeley Berkeley most often refers to: *Berkeley, California, a city in the United States **University of California, Berkeley, a public university in Berkeley, California * George Berkeley (1685–1753), Anglo-Irish philosopher Berkeley may also refer ...
,
Harvard Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of higher le ...
, Massachusetts Institute of Technology, University of Pennsylvania, Princeton,
Columbia Columbia may refer to: * Columbia (personification), the historical female national personification of the United States, and a poetic name for America Places North America Natural features * Columbia Plateau, a geologic and geographic region in ...
, Duke,
Stanford Stanford University, officially Leland Stanford Junior University, is a private research university in Stanford, California. The campus occupies , among the largest in the United States, and enrolls over 17,000 students. Stanford is considere ...
and Yale. Freshwater schools include the University of Chicago,
Carnegie Mellon University Carnegie Mellon University (CMU) is a private research university in Pittsburgh, Pennsylvania. One of its predecessors was established in 1900 by Andrew Carnegie as the Carnegie Technical Schools; it became the Carnegie Institute of Technology ...
, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester and Minneapolis are located nearer to the Great Lakes. The Saltwater school is associated with Keynesian ideas of government intervention into the free market while the Freshwater schools are skeptical of the benefits of the government.Kilborn PT. (1988)
'Fresh water' Economists Gain
''New York Times''.
Mainstream economists do not in general identify themselves as members of a particular school, but they may be associated with approaches within a field such as the rational-expectations approach to
macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...
.


See also


Concepts

*
Consumption (economics) Consumption is the act of using resources to satisfy current needs and wants. It is seen in contrast to investing, which is spending for acquisition of ''future'' income. Consumption is a major concept in economics and is also studied in many o ...
* Economic liberalism * Economic sociology * Financial market * Free price system *
Gains from trade In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
* History of capitalism *
History of economic thought History (derived ) is the systematic study and the documentation of the human activity. The time period of event before the History of writing#Inventions of writing, invention of writing systems is considered prehistory. "History" is an umbr ...
* Industrial Revolution *
Mass production Mass production, also known as flow production or continuous production, is the production of substantial amounts of standardized products in a constant flow, including and especially on assembly lines. Together with job production and batch ...
* Objectivism * Positive non-interventionism *
Spontaneous order Spontaneous order, also named self-organization in the hard sciences, is the spontaneous emergence of order out of seeming chaos. The term "self-organization" is more often used for physical changes and biological processes, while "spontaneous o ...


People

* Amartya Sen * Andrew Carnegie *
Ayn Rand Alice O'Connor (born Alisa Zinovyevna Rosenbaum;, . Most sources transliterate her given name as either ''Alisa'' or ''Alissa''. , 1905 – March 6, 1982), better known by her pen name Ayn Rand (), was a Russian-born American writer and p ...
* Eugen von Böhm-Bawerk * Frank Stilwell *
Frederic Bastiat Frederic may refer to: Places United States * Frederic, Wisconsin, a village in Polk County * Frederic Township, Michigan, a township in Crawford County ** Frederic, Michigan, an unincorporated community Other uses * Frederic (band), a Japanese r ...
* Friedrich Engels * John D. Rockefeller *
John Locke John Locke (; 29 August 1632 – 28 October 1704) was an English philosopher and physician, widely regarded as one of the most influential of Age of Enlightenment, Enlightenment thinkers and commonly known as the "father of liberalism ...
*
Joseph Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, and a full professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the Joh ...
* J. P. Morgan * Karl Marx * Milton Friedman


Works

* '' Capitalism and Freedom'' * '' Capitalism: The Unknown Ideal'' * '' Economics in One Lesson'' * '' Free to Choose'' * '' Grundrisse'' * ''
Individualism and Economic Order ''Individualism and Economic Order'' is a book written by Friedrich Hayek. It is a collection of essays originally published in the 1930s and 1940s, discussing topics ranging from moral philosophy to the methods of the social sciences and economic ...
'' * ''
Man, Economy, and State ''Man, Economy, and State: A treatise on economic principles'' is a 1962 book of Austrian School economics by Murray Rothbard Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School ...
'' * ''
The Anti-Capitalistic Mentality ''The Anti-Capitalistic Mentality'' is a book written by Austrian School economist and libertarian thinker Ludwig von Mises. It is an investigation into the psychological roots of the anti-capitalistic stance that Mises saw as widespread in the ...
'' * ''
The Law The Law may refer to: Books * ''The Law'' (Bastiat book), an 1850 book by Frédéric Bastiat * ''The Law'' (novel), a 1957 novel by Roger Vailland * ''The Law'' (novella), a 2022 novella by Jim Butcher Film and television * ''The Law'' ( ...
''


References


Further reading

* Abu-Lughod, Janet L. ''Before European Hegemony The World System A.D. 1250–1350''. New York: Oxford UP. 1991. * * * * * * * * * * * * * * * * * * *
Josephson, Matthew Matthew Josephson (February 15, 1899 – March 13, 1978) was an American journalist and author of works on nineteenth-century French literature and American political and business history of the late 19th and early 20th centuries. Josephson popu ...
, ''The Money Lords; the great finance capitalists, 1925–1950'', New York, Weybright and Talley, 1972. * * * * * * * * * * * * * * * * * {{DEFAULTSORT:Perspectives On Capitalism Capitalism Capitalist systems Economic liberalism Ideologies Social philosophy Individualism