Capitalism is a system of economic organization in which private individuals or private organizations predominantly own the means of production, distribution and exchange of goods and services. Capitalism favours the free market (in which buyers and sellers trade independently of third-party – typically government – interference), with private profit a driving force in decision-making in everything, from investment and wages to production levels and pricing. The theory goes that the capitalist desirous of maximizing his profit will supply the market with what it most wants in the most efficient way.
The decline of feudalism and mercantilism
Many societies had incorporated aspects of capitalism into their economies since ancient times but until the medieval ages, feudalism dominated European society. This was a system in which most land was owned by the crown and the noble classes. They permitted the populace to live on the land, typically as serfs scratching a meagre existence from farming and in return paying homage and owing a certain amount of labour and produce to the landlord, as well as military allegiance. With the decline of feudalism from the 15th century and the rise of the nation-state – and with it liberal politics and laissez-faire trade – capitalism gradually became the most common mode of economic organization, firstly in Europe and then across the globe.
With the coming of the Industrial Revolution and the decline of mercantilism (see Protectionism here), capitalism was enshrined as the prevailing economic orthodoxy in the 18th and 19th centuries by the likes of Adam Smith and David Ricardo. Where once wealth had gravitated to a small group based on their noble birth or military prowess, the economic behemoths of the capitalist world were entrepreneurial ‘captains of industry’ and financiers. Where feudalism had preserved old wealth, now anybody could make it rich – although in reality only a few did.
Some have argued that capitalism merely replaces one method of wealth ring-fencing with another. Among the system’s fiercest critics were Karl Marx and Friedrich Engels, who declared that the pursuit of individual self-interest is ultimately injurious to the common good. Furthermore, they suggested, the capitalist exploits his workers, ensuring a long-term disparity in wealth distribution, while the system as a whole is prone to peaks and troughs, causing damaging waves of first over-production and then shortages and unemployment.
For all its undeniable faults, capitalism has dominated the global economic picture for some two hundred years. Today, most of the developed world operates a system of mixed economies, in which capitalism rubs up alongside state intervention in certain sectors, such as health and education.
Ludwig von Mises said: ‘All people, however fanatical they may be in their zeal to disparage and to fight capitalism, implicitly pay homage to it by passionately clamouring for the products it turns out.’